John Deere versus the competition

(Full disclosure: my clients and I own shares of Deere)

Last week, I wrote about some of the issues surrounding the agricultural sector, and raised the question of whether John Deere (DE) might be a good, but lumpy, investment. This week, I put some meat on the bones of my last post with a competitive analysis comparing John Deere to its next two largest competitors: CNH Industrial (CNHI) and AGCO (AGCO).

Revenues

John Deere’s revenues are quite a bit bigger than it’s two biggest rivals ($ in millions).  

Deere: 2013 $34,998, 2012 $33,501
CNHI: 2013 $21,128, 2012 $22,157
AGCO: 2013 $10,787, 2012 $9,962

As you can see, Deere is 1.6x the size of CNHI and 3.3x the size of AGCO in revenues. Granted, these numbers are revenues and not units, and Deere tends to sell larger, more expensive tractors and combines than it’s competitors, so the revenue numbers may point more to product mix than unit dominance. In terms of value sold, or market share, though, Deere is clearly far in the lead.

Regional Revenues (note: CNHI includes Mexico in it’s North American segment, AGCO and Deere include Mexico in their Latin America segments)

North America (includes Mexico for CNHI, not for AGCO and Deere)

Deere: 2013 $21,821, 2012 $20,807
CNHI: 2013 $5,618, 2012 $5,429
AGCO: 2013 $2,758, 2012 $2,584

Deere is 3.9x CNHI and 8x AGCO in North America. Deere dominates in large, high power tractors by a large margin in this all-important market.

Latin America (includes Mexico for Deere and AGCO, but not for CNHI)

Deere: 2013 $4,287, 2012 $3,589
CNHI: 2013 $1,968, 2012 $1,507
AGCO: 2013 $2,040, 2012 $1,856

Deere is 2.3x CNHI and 2x AGCO in Latin America. Deere isn’t as dominant in Latin America as they are in North America, but they are still dominant.

Europe, Middle East, Africa (EMEA), Asia, Asia-Pacific

Deere: 2013 $8,890, 2012 $9,105
CNHI: 2013 $5,037, 2012 $5,252
AGCO: 2013 $5,989, 2012 $5,522

Deere is 1.7x CNHI and 1.6x AGCO in EMEA/Asia/Asia-Pacific. Deere has even less dominance here than in Latin America, but they still dominate nonetheless. This makes sense considering the greater use of smaller, lower horsepower tractors and combines in these markets (because Deere skews to larger, high horsepower equipment).

Operating Profit

Here, too, Deere is just plain bigger.

Deere: 2013 $5,425, 2012 $4,724
CNHI: 2013 $2,002, 2012 $2,145
AGCO: 2013 $1,510, 2012 $946

Deere is 2.5x CNHI and 4.3x AGCO in profit share. Those dollars don’t just make the company richer, it makes Deere capable of plowing much more back into improving efficiency and innovating new products.

Research and Development

Deere’s higher profits allow it to put more money into engineering newer and better equipment.

Deere: 2013 $1,477, 2012 $1,434
CNHI: 2013 $710,  2012 $718
AGCO: 2013 $353, 2012 $317

Deere outspends CNHI 2x and AGCO 4.4x. Those larger research and development dollars give Deere an edge in maintaining its technological and manufacturing lead.

Capital Expenditure (capex)

Deere spends more on new capital than it’s competitors.

Deere: 2013 $1,155, 2012 $1,315
CNHI: 2013 $1,035, 2012 $1,046
AGCO: 2013 $391, 2012 $341

Deere is out-spending 1.2x CNHI and 3.4x AGCO in capital expenditures. More importantly, Deere is generating higher returns on its capex than CNHI or AGCO (as measured by examining incremental growth in net income versus incremental spend on capex over three year periods).

These numbers aren’t an exhaustive proof, but they do give you an idea of why Deere might be able to continue dominating the farm equipment market. My comments should not be meant to imply that AGCO and CNHI are slouches, it’s just that Deere has done that much better (in fact, AGCO has been doing an excellent job of coming from behind over the last 10 years whereas CNHI has tended to just keep pace). 

I think Deere’s dominating scale gives it a sustainable competitive advantage over rivals, assuming management doesn’t squander that lead (an issue I will address in a later article). But, this doesn’t mean the economics of the business are necessarily good. Next week, I’ll tackle this topic to see if the economics of the industry and Deere specifically are good enough to want to own.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

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John Deere versus the competition

John Deere: down on the farm

(Full disclosure: my clients and I own shares of Deere).

This has been a tough year for the agriculture sector. After a couple of fat years of high profitability, farmers and those who sell to farmers are worried about a couple of lean years. The agriculture sector is a victim of it’s own success. High productivity has led to bumper crops that are driving down the prices of corn, soybeans, wheat, etc., and that is leading to lower profits for farmers and lower demand for farm equipment.

That has led to speculation about how long the farm sector will be down. I’ll kill the suspense: no one knows. 

On the one hand, you have huge supply, both from farmers in the U.S. and around the world (Brazil, in particular, has become very productive). Lots of supply drives down prices. This supply has been “enhanced” by government support of ethanol production and loans for farmers to buy equipment, which means the oversupply may last. 

On the other hand, you have demand. Global demand has subsided with slow developed economies in the U.S., Europe and Japan, as well as slower developing and emerging economies in the rest of the world. This is likely to be a temporary phenomenon, but it could last, especially with bad economic policies or geopolitical issues.

So, no one really knows how long this downturn might last. Higher demand caused by accelerating economic growth could make the downturn very brief. Lower supply is the rational economic outcome from low crop prices. How these factors play against each other is simply unknown and unknowable.

But, that is what makes the farm sector such an interesting place to look for value investments. 

The economics of the business are good, especially for equipment manufacturers. There are three big producers of farm equipment that share more than 50% of the global market, and that share is likely to grow over time. Those manufacturers are John Deere (DE), Case New Holland International (CNHI) and AGCO (AGCO). 

John Deere has the largest share of revenue and profits, and they have wisely plowed those profits back into making better equipment. That gives Deere a sustainable competitive advantage they can maintain as long as they are well managed. Deere dominates the high end of the market for tractors and combines, which is the direction global markets are going as farming becomes more productive and mechanized over time.

That, however, does not remove the cyclical nature of the business. Farm cycles go boom and bust due to government interference, lending practices, weather, global demand, and a host of other issues. This cyclical nature isn’t necessarily a bad thing. As Warren Buffett says, I’d rather have a lumpy 15% than a stable 12%.

So, is John Deere a good investment capable of providing a good, but lumpy return? That is the topic I’ll pick up again next week.


Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

John Deere: down on the farm

Perhaps a Roth IRA isn’t so safe after all

If you could perfectly predict the future, financial planning would be a piece of cake.

Unfortunately, that’s not possible. Future rates of return and inflation are not precisely predictable. Neither is how long you will live. Neither are tax rates.

Which brings me to the topic for today. The Roth IRA is a great deal because it allows you to save and invest after-tax dollars that won’t be taxed on withdrawal. Even better, unlike a traditional IRA or 401(k) plan, retirees aren’t mandated to pull certain amounts out each year, providing flexibility in income and tax planning. Better still, you can pass those dollars on to heirs with much fewer restrictions than is the case with a traditional IRA or 401(k).

That is, unless they change the rules.

Well, apparently, changing the rules is precisely what is being considered. According to an article in the WSJ, two proposals being sent to Congress are trying to do just that.

First, one proposal seeks to require Roth owners to start taking distributions at age 70 1/2, just like with traditional IRAs and 401(k)s. That would remove a major element of the Roth’s appeal both for retirees and their heirs.

Second, the other proposal attempts to end the ability of heirs to stretch out distributions. This would eliminate another of the major appeals of the Roth IRA as an estate planning tool.

The Roth IRA has created a garden industry of advisers, lawyers and accountants who have helped investors (for an hourly fee, of course), to shuffle assets from traditional IRAs to Roths and back again in order to dodge the tax man. This has always been premised on the predictability of the law, which is now in question.

And, this brings us back to the difficulty of financial planning. It isn’t easy, nor is it rocket science. What makes financial planning difficult is that it is inherently decision making under uncertainty. If you say X will result if Y occurs, there is usually an assumption behind that. When that assumption can and almost certainly will change–like tax laws–you can wind up with plans that aren’t quite as solid as they were described to be.

I frequently council investors against setting their financial plans in too much concrete. Instead, a range of assumptions for returns, inflation, taxes, etc. should be used. Nor should it be assumed that things like Social Security will be around, especially for younger investors; at any point in time, the majority or vocal minority can yank away the benefits you were promised. 

Instead, it’s best to plan to take care of yourself regardless of how the rules are changed. It’s better to be approximately right than precisely wrong.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Perhaps a Roth IRA isn’t so safe after all

China: how will its mass urbanization impact the global economy

China’s impact on the global economy is hard to overstate.

Not only is it the world’s second largest economy (by country, not region), but also the source of a huge amount of incremental growth over the last 15 years.

I’ve seen estimates that over 50% of the demand for iron ore and copper comes from China. Almost 50% of worldwide steel is produced in China. I once read that China has used as much concrete in 2011 and 2012 as the U.S. used in the 20th century! I don’t know if such estimates are specifically accurate, but their magnitude gives you a flavor of how China has impacted the global economy. In short, the economic crisis since 2008 would have looked a lot worse without China.

Given that, it’s important to consider the impact of China on future economic growth. 

One of the dynamics going on in China is the move from a more production-based to a consumption-based economy. China is approximately 34% consumer-based versus 70% in the U.S. China has built an economy, predominantly from the top down, that has mostly produced goods for other countries, like the U.S., Europe and Japan. But that source of growth was limited. You can only take market share for so long before you need to become your own source of growth.

China is trying to make that transition, but getting a command and control economy to do that without large disruptions is very difficult. 

One aspect of such a transition is having hundreds of millions of Chinese farmers move from the hinterland to cities. In cities, they can work in factories and produce much more than they can on the farm. That higher productivity leads to higher consumption, thus achieving China’s goals. 

But, how do you move hundreds of millions of people from farm to city. In the west, and Japan, that transition took place over many decades, and mostly organically (by organically, I mean through free market forces, not through government fiat). Those transitions led to disruptions, just as it will in China.

China, however, is trying to do this much more quickly and on a much more massive scale. China wants to move around 235 million people to cities over the next 20 years. For perspective, that’s the size of the 10 largest cities in the world now (from Tokyo at 37 million to Mexico City at 20 million). Can you even imagine trying to regrow 10 of the largest cities in the world, over the next 20 years? (for more information, read Stratfor’s article on the subject)

Achieving such a task is Herculean, and it will impact the global economy.

How? I don’t know. It could all happen smoothly, which I consider unlikely. It could occur with either international or domestic war, as such pressures have created throughout history. It could happen in fits and starts with massive swings in economic growth from boom to bust. No one knows, really, but it bears watching.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

China: how will its mass urbanization impact the global economy