Deere (NYSE: DE) is one of the biggest farm-equipment makers, and its projection of record net income this year shows how solid its business is. But no company is perfect, and only detailed scrutiny can give us a clear picture. Let's take a look into Deere's strengths, weaknesses, opportunities, and threats to see where it exactly stands.
Strengths
- Brand name. Think of tractors, and the first name that pops up is Deere. The company has built a solid reputation over the past 175 years and found its way to the list of 100 Best Global Brands last year. Deere also features in Fortune magazine's list of 50 most-admired companies.
- Huge global play. Regions outside the U.S. and Canada accounted for over 40% of Deere's total equipment sales last year. This could get even bigger given Deere's focus on expanding in fast-growing emerging markets. In 2011 alone, it announced six new factories in markets like India, China, and Brazil.
- Solid R&D and innovation. Deere spent a record $1.2 billion last year on new products and technology, which included the introduction of its largest-ever lineup of new agriculture equipment.
- Great performance and shareholder value. Deere's revenue has grown at a good compounded-average rate of 19.7% over the past two years, with the bottom line increasing a whopping 75.7% during the same period. The company boasts a solid return on equity of 42.2%. It raised its quarterly dividend twice last year, currently yielding a decent 2.3%.
Weaknesses
- European woes. Europe is one of Deere's main markets, accounting for nearly 20% of total sales. Deere's production outside the U.S. and Canada during the first quarter was 16% lower than projected, because of weakness in the European region.
Opportunities
- Widening customer base. With farmers even in developing nations warming up to automated and advanced equipment, innovative Deere products launched in 2011 could find more takers, adding significantly to Deere's sales.
- Brazil. Deere is entering Brazil's construction market with two new factories at a time when the nation is bracing for the 2014 World Cup and 2016 Summer Olympics. Surely it's a great time to tap the high-potential market.
- Emerging market potential. Rising global population and the resultant higher demand for food means brisk business for Deere. Expanding in emerging markets, in particular China and India, could prove to be Deere's forte.
Threats
- Macro obstacles. Deere's sales depend largely on macroeconomic factors that are beyond the company's control, such as prices of essential crops. Lower crop prices would mean lesser incentives for farmers to plant, hence softer demand for farm equipment. Other factors like weather disruptions can also affect crop plantations.
- Slow home economy. The bulk of Deere's construction business comes from the U.S. As long as construction activity in the country remains sluggish, Deere's construction revenue could remain under pressure.
- Euro-zone fears. Deepening of the crisis in Europe could hurt Deere's production and revenue.
The Foolish bottom line
Expanding overseas brings with it challenges related to the global economic situation. But Deere's experience and expertise should make things relatively easy for them. The scale seems to tilt more towards the pros than the cons, and Deere remains a company that should continue rewarding its shareholders.
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