Current Price: ~ $88/share
Projected Yield: ~ 1.87%
Based in Moline, Ill., Deere designs and manufactures agricultural, landscaping, construction, and forestry equipment. The firm typically finances a large portion of its equipment sales through its Deere Credit subsidiary. Founded in 1837 by John Deere, the company now employs more than 50,000 people around the world.
Estimated WACC for the firm today is 10.52% using the Capital Asset Pricing Model and the company's recent SEC filings.
Recent free cash flows and noted growth rates:
Year

FCF
$Millions

2002

1520

2003

1226

2004

799

2005

704

2006

207

2007

1275

2008

341

2009

677

2010

969

2011

646

Average Annual Growth FCF: ~ 46%
CAGR FCF: ~ 9%
Consensus Forecast Industry 5Year Growth: ~ 18% per year
Consensus Forecast Company 5Year Growth: ~ 14% per year
Internal Growth Rate: ~ 5%
Sustainable Growth Rate: ~ 49%
Scenario 1
Start at $1520 million FCF (the highest level of FCF achieved in the past 10 years), assume the company achieves a 5year growth rate in FCF of 14% per year then 4% growth in FCF per year forever:
Discounted Cash Flow Valuation
Year

FCF
$Millions

0

1520

1

1733

2

1975

3

2252

4

2567

5

2927

Terminal
Value

51175

The firm's future cash flows, discounted at a WACC of 10.52%, give a present value for the entire firm (Debt + Equity) of $39385 million. If the firm's fair value of debt is estimated at $26278 million, then the fair value of the firm's equity could be $13107 million. $13107 million / 404 million outstanding shares is approximately $32 per share and a 20% margin of safety is $26/share.
Scenario 2
All else being equal, assume the company achieves a 5year growth rate in FCF of 14% per year, then 6.75% growth in FCF per year forever:
Discounted Cash Flow Valuation
Year

FCF
$Millions

0

1520

1

1733

2

1975

3

2252

4

2567

5

2927

Terminal
Value

88509

The firm's future cash flows, discounted at a WACC of 10.52%, give a present value for the entire firm (Debt + Equity) of $62027 million. If the firm's fair value of debt is estimated at $26278 million, then the fair value of the firm's equity could be $35749 million. $35749 million / 404 million outstanding shares is approximately $88 per share and a 20% margin of safety is $70/share.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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