Episode 59 | Can John Deere Emerge as a Tech Company?

In Episode 59 of “Market News with Rodney Lake,” Professor Lake, director of the GW Investment Institute, provides a detailed analysis of John Deere’s financial condition, highlighting declining revenue, shrinking margins, and weakening free cash flow despite heavy capital expenditures aimed at driving innovation. Management under CEO John May has sought to reposition Deere as a technology company, but challenges persist with tariffs, slowing growth, and questions around execution. The company trades at a premium valuation relative to peers with a strong return on equity, but its deteriorating balance sheet—marked by $56 billion in net debt, rising preferred stock, and a low interest coverage ratio—raises significant concerns. Lake notes that John Deere requires close monitoring of their ability to successfully transition into a true technology company and how this impacts their financial stability.

Chapters

• 0:00 Introduction
• 2:17 Business
• 12:49 Management
• 14:43 Price/Valuation
• 16:22 Balance Sheet
• 20:28 Conclusion

Transcript

Thank you for joining “Market News with Rodney Lake.” This is a regular program for the GW Investment Institute where we talk about timely market topics. I'm Rodney Lake, the director of the GW Investment Institute. Let's get started.
Welcome back to “Market News with Rodney Lake.” I'm your host, Rodney Lake.
Welcome from the GW George Washington University School of Business. Duquès Hall, Duquès family studio right here in the heart of Foggy Bottom. Classes are about to begin. Great time to be on campus. This is a program from the GW Investment Institute. Our students manage a little over $10 million of endowment funds.
So their client is the university, and we train our students how to manage that money, how to do security analysis, how to build quant models, how to look at real estate investment trust, how to think about venture capital. And so all that happens here and it's about to get started. We're super excited about that. Excited to welcome our students back to campus and get back to work.
Remember not investment advice educational purposes only. Today we're going to cover a company that it's in our portfolio, one of our portfolios. That company you've probably heard of. And if you're a farmer or you run big machinery, you might have even had one of their machines. Or if you have a lawn mower too. The company is John Deere.
Deere and Company. The ticker is DE. Now this has been in our portfolio. It hasn't performed all that great. Now this is a massive company. On the CapEx side, you know big machinery. And so this is not a, you know, high margin software as a service business, but it is an important business and an important business for the US.
And so let's dive into this. We're going to use the GW Investment Institute framework business, management, price valuation, and balance sheet to analyze this company. And we'll go step by step. And at the end we'll pull it all together. I'll let you know what I think about okay. What are the things that you should be thinking about for John Deere?
And certainly our analysts in the fall here are going to need to start thinking about this company. And how does it fit in the portfolio? Does it continue to make sense to hold it? Should we size up this position? Should we reduce this position so we take it out of the portfolio altogether? But our analyst will be working on that and they'll be working hard this fall semester on our all of our portfolios, including this company right here.
So let's first dive in John Deere. So what do they do? I think most people really understand what they do. Right. So they make big machinery. And they have, you know, their you know, most of their sales come from the US, but they're a global company. They sell into to Europe, Latin America. Asia, Africa and Australia and Canada.
And so but by and large, you know, this you can think of this, is that the preponderance of their revenue over 50% comes from the US, you know, production and precision ag also, a big part of their revenue, vast majority of it. And so that is grown at 3% or, sorry, over the last three years at 8%.
And so when you talk about John Deere, lots of people think, okay, this is just a company that makes machinery. Now the current CEO will get which we'll get to John May has talked about this company as a technology company. And so it manufactures and distributes a broad range of agricultural, construction, forestry, and commercial and consumer equipment, consumer being those lawn mowers or at least part of it, they're but now it says, okay, well, this precision ag part and all the things that they're trying to do, this is really a this is really a technology company.
So says the CEO John May. And we're going to talk about, management here when we get to it. So on the business side, I think most people know what they do, know what their products are, know what people use them for. Obviously, they're in the farming, the ag business, in the construction business, and all the way down to people mowing their grass and using them, on the consumer side.
So I think people are at least familiar with this company, which is not always the case. And some of the companies that we own in the portfolio. Now, this is not quite as familiar as a Procter and Gamble where you use Tide, you know, maybe every day in your household washing clothes, but it's something that people can relate to.
I think, certainly on the consumer side. But understanding what farmers do with these things, planting crops and harvesting them, for example. All right. On the market cap side, this is a large company, but not enormous, $133 billion market cap for John Deere, the ticker DE. So that's a big company, but it's not an enormous company.
So let's now dive into the financials here. So when we talk about the financials again we start with the market cap. Just so we get a sense of how large this company. Remember you're in the trillions of dollars with companies like Nvidia and Apple and Microsoft. So it's not that large. But it's still a very significant company $133 billion, still a lot of money in 2025.
But not in the trillions of dollars. All right. So let's go for revenue first. All right. So last reported number, the trailing, last 12 months here, 7/27 is the report that they have out, 2025 the revenue 44 billion. So that's good. So where that's not good rather but it's, you know, it's where it was.
Where what happened? That's -20%. So not good right. You know you can talk about impacts from the tariffs. And they're still serving their way through how that's all going to work out. You could say that there's maybe an industrial slowdown for the for their clients or uncertainty. And so maybe people are don't want to purchase. And so there's all kinds of things that can be happening in that space.
But it's important for us, the shareholders, to really try to figure out what do we think is happening. So all right, well, let's look at the revenue over time. You know, is this a one time thing or this has this been happening? Even you know, pre tariffs for example. And so if you look back to 2021 you're at 44 billion.
So basically we did a round trip since 2021. That's not great right. Four years later we're we're there. You know the fiscal is 10/30. So it's a little it's just shy of the four year period. But we've almost just done a round trip. Not great. And actually the projected full year, which is 10/31, which is their fiscal year, is going to be lower, at 38 billion.
So that's not great. That's a projection. And that would be -26%. And again, that's lower than the 10/31 2021 number. So that's a big concern. That is definitely, you know, raising some red flags for us as analysts to say like, well, okay, well, obviously if you only have that data point that that's still a big concern. And we're going to have to dig more.
But certainly it would say, okay, well we got to work on this. Okay. Well what else has been happening on the revenue side? 22, 2022. You're right. 52 that was a 19% increase. That's very good. Then you go to 23 16%. So decline in that second derivative. But overall growth in the first derivative. And then 51 million in 2024.
Again. This is a 10/27 basically October month in for their fiscal year. And that was -15%. Not good. And if you look at the projection, for the full year ten, which will be 10/31 2025, you're talking -26 and then 26 that -26%. And then in 2026, the 10/31 number 41. So that's 8.5.
That's pretty modest growth. Obviously it's a big company. So that's those are reasonable numbers. But that's not great. And again that puts you with less than five years ago at 44 billion on the revenue side. So you know that's something that we should be concerned about. Something that you know, where do we think this growth is coming from.
Do we think that that's going to continue to have headwinds, that the tariffs and the customers abroad, you know, are going to be impacted by that? Well, we'll have to wait and see there. Let's dive into the gross margins. So the gross margins, these aren’t terrible. So if you look at the gross margins in the last 12 months, July month end, you're talking, 39, almost 40%.
So that's good. And if you look back 21 it was 33, 22 32, 23 38 and then 24 40 and then I gave you the last 12 months and the projected here, going to 28. Not good. Going to 29. Not good. And so what's happening? That's something we're going to have to dive into. And certainly our analysts are going to be thinking about what's happening there.
Now. Why have the gross margins improved? Well, if you're trying to get to be more of a technology company and you're selling more things that for precision ag, those can be higher margin. If you're selling systems and you're selling services on top of those systems to clients, to farmers, with the precision ag, that can be helpful.
And if you're if you're selling really technology products, obviously, that have higher profit margins than the machinery. So the machinery plus all the tech plus the services, that can that can help you drive that. Now, that big headwind that's not been happening though. It's going the other way. It rather it has happened and it seems to be trending the other way, something that we're going to have to dig into, and, you know, you're going to need to be thinking about on the net income side.
And so if you look at the 7/27, 2025, 5.2, that's a modest increase, 11%. And they're projected at 5 billion for the end of the fiscal year 10/31/2025, a modest 13% not terrible increase on the net income margins projected. Again, we care about where is the company going in the next year, three years, five years, next year projection for 10/31/26 5.6, up 13%.
So that's great. So the revenues declining, the net it the net income though is back on the mend here. But if you look back through, what's happening and we're going to go through the numbers, but let's, let's drop down to also talk about what's happening on the cash from operations 8.5 billion through the trailing 12 months.
And then your minus, 4.5 billion in CapEx. So they're putting a lot of money to work. That's good. So as investors, you know, if you can deploy this capital back into the business and get high returns, that's great for us. It's very tax efficient. For for the shareholders overall. And it's also you know, if they know what they're doing and they have those growth opportunities, they should be deploying that capital back in their. Free cash flow.
4 billion. That's not bad. But let's look back on on these metrics. So we talk about cash flow from operations, CapEx, and free cash flow. So you're talking in 2021 7 billion I'm going to round here 2.5 billion for CapEx and 5.1 billion for free cash flow. Not bad. 2022 you're at 4 6 3 7. So a big year putting a lot of money to work.
Free cash flow down 911 million. And then 2023 8.5 billion from cash flow from operations -4.5 billion for CapEx. So good again deploying money to the business. Hopefully that's you know, where they're saying, okay, we're we're driving, innovation, 4 billion in free cash flow. 2024 you're talking 9.2 in cash from operations 4.8 for CapEx.
Again, another big year for investing and then for 4.5 billion approximately in that, free cash flow. So now we're up to 2025. We want to have these numbers. You're at 8.5, 4.4 and four. Great. And then but the projections are that looks like they're going to need to slow down on that CapEx. Right. So if you see this uncertainty the revenue has been dropping.
They're going to you know, the projections are that CapEx is going to go down to 1.4 and 1.5, respectively, for the full year 2025, and then 26. And so, all right, that means they're going to be dropping pretty dramatically, from where they have been. And then free cash flow for those years, 3.5 for the 2025 full year, 10/31.
And for the full year. 10/31 2026 6 billion in free cash flow. So, you know, this is drawing a lot of concerns when we go over the financials for Deere. Now, how can they reposition itself as a tech company? That's not going to be easy. I think it's going to be a big challenge for them. Certainly they're an old line company in general and they've been serving, you know, very traditional clients.
And they're obviously added, other clients along the way over that history and construction and forestry is all mentioned. And lawn tractors, as we talked about on the consumer side. But how do you get this growth engine restarted? That's something which will move on to management. So what are we going to give the business? So let's give a score before we move on.
I think right now the business is a six. And so why. Well, because revenue is an issue. The margins are an issue. And free cash flow, is obviously not improving. And so right now we're going to give it a six. And obviously, you know, trying to figure out what's happening with this business along with the tariffs.
I think it's a six for now. And we're going to have to do more research absolutely on this company for the fall in our portfolio. But for me it's a big concern. What's going on with John Deere. And certainly, you know, management's got to really sort this out. So we talked about management. So who's run this company?
John May. And again, he's trying to reposition this company as a tech company. And he's been there for about five and a half years. And he's, he's CEO and chairman of the board. So what can we say about that? Well, if we go back on the financials, obviously it does not paint a great picture of what's been happening recently.
Excuse me, on the revenue side. And so I think until we can excuse me, get some clarity on what's happening, around the tariffs, how they think they're going to mitigate those tariffs. Not just, you know, in the short term, but really what's going to really drive growth. And so if you look at those numbers, to me that that is an enormous concern around management.
You know, obviously, you know, doing a reasonably good job in the past. But when you start talking about those revenue numbers dropping 20% projected to drop 26% and then only bouncing back 8.5% for 26, that's a concern. Dropping 26% for the full year, 25, which is 10/31. So that's a big concern. And again, maybe they'll blame the tariffs or the impact.
So certainly as analysts, as business people, investors, we're gonna have to figure that out. We're going to pay attention to what's happening there. But other concerns, gross margins are dipping net margins are, you know, hovering, basically where they are. So those things we need to be watching, they have deployed a lot of CapEx. You know, where has that money gone?
Where are we going to see the benefits? Are you going to see those benefits in the net margins? So you're going to see those net benefits in the increased tech, and it's going to be a tech company. Well, I think that that is a wait and see for that. So for the management I think we're going to give them an okay score of a six also.
So business we did a six. The management, we're doing a six. So let's move on to the price versus the valuation here. So where is this company valued right now. So let's remember always thinking forward. So we're looking at the forward PE 26 times about 26.5 times. You know that's you know certainly not a cheap valuation.
And if you look at Deere versus their competitor group they're they're trading at a premium to their peer group. If you use a peer group overall in the industrial sector, they're about 22 times, versus their peer group. You know, that's okay. The return on equity for for John Deere, you know, 21 almost 22%. And so that's certainly a better return on equity than their peer group.
Right. Averages is about seven for their peer group in this industrial group equipment makers. So okay so you definitely give them a little bump up the valuation there. But do you want to pay 25 times for what's happening on the revenue side? What's happening on the margin side for us? Not right now. So that's something that our analysts are going to need to figure out 25 times.
Seems a little bit unreasonable. Let's say to me, based on what's happening. So we're going to have to dig in. We're going to have to really pay attention to what's happening on the revenue side, on the gross and the net margin side, and make sure that this transition to a technology company is actually going to happen, that this management team, John May and company, can actually execute on that thesis.
And as analysts, I think we need to really be watching for that. So on the valuation side, I would also give them a six. And so we can probably think of a little bit further down. But we're going to we're going to do that for now. All right. So now let's move on. To the balance sheet.
All right. So if we if we go to the balance sheet, what's happening there. Well that's not good news there. And so again, not painting a great picture of what's happening there and so on. The cash and cash equivalents, if you look at the the 7/27/2025 last reported numbers here, 9.9, let's say 10 billion rounded up, be kind on that.
You have a big preferred here, which is not great. And it's increased from 36 to 54. So that's not that puts pressure on obviously the equity holders. But even worse here you got debt of 66 billion. So you got net debt. I'm nearly $56 billion or approximately a little bit more than $56 billion. Not great.
Which with a slugger, big, you know, big slug of preferred not also great for standard equity holders. So that that's not a comfortable place to be. This is not going to help us sleep at night. So this balance sheet is going to keep us awake and we're going to be concerned about that. And you know, so let's also then check.
Okay. Well, what's, you know, what do we think the interest coverage ratio. Remember that's earnings before interest and taxes over the interest expense. So you know what's that number look like for John Deere? Well you know we like to have ten or better at a minimum. And right now earnings before interest and tax over total interest expense 3.7.
That's not great. So the balance sheet is a big concern. That's a lot of net debt. This definitely is going to keep us up at night. And if you think about what management has been doing over time let's take a look at that. And so the current is bad. Where have they gone? Has is it bad. It. But it's been improving.
Well let's let's look at it over the last few years. And so it's basically getting worse. And so if you think about 2021, 8 billion, 8.7 billion and total debt for 48, and 36 and preferred 36 billion, and it really it's deteriorated over time. The cash has improved a little bit. But the net debt has gone up.
And again, now you're talking you went from eight, seven, and 48 in total debt, and then now you're at 9.9 10 billion, 66. So 56 billion preferred to have gone from 36 to 54. So this is not a great situation. And so if you think about management's job on managing the risk for balance sheet for equity investors, for John Deere.
So we're not we're not holding any of the debt. So for us that's a big concern and absolutely keeping us up at night. So this is another red flag on John Deere. You know maybe you know putting you know, this transition into a tech company. Is it maybe it's not working as quickly as it should. But as investors and the equity portion, you know, this is a is an enormous concern for, for us at the GW Investment Institute.
And so what will we say for the balance sheet? Well, I think a generous score for the balance sheet is going to be a five. And so with all those concerns that we have, I think none of them are allied. And if you look at again, we'll go back to the interest coverage ratio for one second, and then we'll go over all the scores, 3.7 not good.
So that's bad. If you have a dip in earnings and they're they have a slowdown in revenue. Right now that number can get worse. And that puts us in a situation where, you know, maybe they don't have money to pay, all their interest expense, rates hopefully are coming down and they can refi some of that, but that's not happening.
In the short term. Certainly not enough for them to refinance a bunch of their debt. And so, again, a big concern there. Balance sheet. I think a five is a very generous score for the condition there. And really, I think, I'm going to give them a four. So not great really, I think let's go even three on this.
All right. So three on the balance sheet. I think it's bad getting worse. Interest coverage ratio really low. Not good. That's a three. That's maybe one of the lowest scores you've given out recently. For the balance sheet. All right. So let's go over all the components: business, management, price valuation, and balance sheet to put the episode together here.
At the end the business we gave a six big concerned again deteriorating fundamentals here on the revenue side on the margin side and a free cash flow side. You know impact from tariffs, possible. Maybe you know this transition to a tech company not working as well as it should management you know correlated with you know, lack of that transition on the business side.
Also giving them a six there. And I think really mismanagement of the balance sheet connected to their these pieces are all obviously interconnected. They get a premium to their peer group. They have a high return on equity. Okay. But still expensive relative to, you know, you can own the S&P for 23 times and not have that same level of risk on the balance sheet.
So you're talking, price versus valuation. I give them a six. And on the balance sheet, really I think you maybe disaster's too strong, but certainly a concern there on the balance sheet side giving them a three overall that is a 5.25 for Deere. We own it in the portfolio. Luckily it's not a big position. But certainly we're going to need to take a look at what's happening with Deere.
I think they're, in a tough spot. The thing that I will be watching closely and certainly will be asking our analyst to check out, that is a business person investor is an analyst. It's around this transition to a technology company and what's going to drive top line sales and what's going to help on those margins. That's the what to look out for on John Deere ticker DE.
That's it for this episode of Market News with Rodney Lake. We'll see you back on the next episode. Thank you.