Mike Rivers' Blog Headline Animator

Friday, September 26, 2014

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.

2 comments:

Anonymous said...

Thank you very much for the good article.

May I ask where you got the regional revenue breakdown?

In the 10-K I only find the division between US&Canada vs. non-US&Canada.

Many thanks in advance

Michael Rivers said...

On the Deere website under Investor Relations, Financial Data, Fact Book, is a treasure trove of data including more detail on geographic breakdown.