Deere

& Company (DE) (Hold) Current Price: $83.96 Target Price: $86.57 Deere & Company manufactures and distributes agriculture and turf equipment, and construction and forestry equipment worldwide. Its Agriculture and Turf segment provides agriculture and turf equipment, and related service parts, including large, medium, and utility tractors; loaders; combines, corn pickers, cotton and sugarcane harvesters, and related front-end equipment and sugarcane loaders; tillage, seeding, and application equipment comprising sprayers, nutrient management, and soil preparation machinery; and hay and forage equipment consisting of self-propelled forage harvesters and attachments, balers, and mowers. This segment also offers turf and utility equipment, including riding lawn equipment and walk-behind mowers, golf course equipment, utility vehicles, and commercial mowing equipment; integrated agricultural management systems technology; precision agricultural irrigation equipment and supplies; landscape and nursery products; and other outdoor power products. The companys Construction and Forestry segment provides machines and service parts used in construction, earthmoving, material handling, and timber harvesting comprising backhoe and landscape loaders, crawler dozers and loaders, four-wheel-drive loaders, excavators, motor graders, articulated dump trucks, skid-steer loaders, feller bunchers, log skidders and loaders, log forwarders and harvesters, and related attachments. Deere & Companys financial services segment finances sales of and leases new and used agriculture and turf equipment, and construction and forestry equipment. This segment also provides wholesale financing to dealers of the foregoing equipment; finances retail revolving charge accounts and operating loans; and offers crop risk mitigation products and extended equipment warranties. The company markets its products and services primarily through independent retail dealer networks and retail outlets. Deere & Company was founded in 1837 and is headquartered in Moline, Illinois. Highlights Based managements preliminary commentaries, constructions segment is not optimistic, while global economic conditions remain sluggish. Due to heat and dry weather, soybeans, corn etc have been growing slower than average time. Prices have been raised in July, resulting in more demand for equipment, and tractor sales. Drought in Nebraska, raising alert with drop in production, and thus much lower demand for new equipments and machineries. 3rd quarter earnings will be release on Aug 14 013 Industry overview After a major downturn in 2009, demand for construction equipment rose sharply subsequently, but the gains moderated in 2013 on more challenging industry conditions. Sales of construction equipment by the world's 50 largest manufacturers grew 2.6% in 2012, to $186 billion. In 2013, constructions business

activities have been constrained largely by foreign influences: The negative shadow casted by another possible major financial crisis from Greeks economic demise, China reported slower than expected PMI; as a result, DEs construction business is not expected to surpass last years result, if not behind. Within the industry, theres been significant demand in non-residential markets, and particularly in emerging markets. Recent challenges related to economic uncertainties, particularly in China, moderated the pace in construction equipment markets in 2013. However, more robust growth is expected to resume once global governments stimulus aids for the economy result in more business growth and activities. Drought conditions in the U.S. brought uncertain conditions to farm and farm equipment markets in recent months. Of the big U.S. crop states, Nebraska - the fourth largest corn state and a leading producer of cattle, sorghum and wheat - is the driest with 88.41 percent in moderate to exceptional drought. That compares to 88.36 percent a week ago and 64.63 percent a year ago. With a large portion of U.S. farms experiencing drought in recent weeks, the drop in the supply of crops such as corn and soybeans brought sharp rises in the prices of these commodities. Yet, the reduced crop size was accompanied by a drop in sales volume. Based on these moderating but still decent trends, sales of farm equipment will show modest growth in the coming year. Increased freight demand and an aging truck fleet resulted in year-to-year gains in North American heavy truck purchases in each month from February 2010 through August 2012. Yet, with economic uncertainties and financing challenges for smaller, less capitalized truckers leading to much slower order trends since the beginning of 2012 (although easier comparisons brought year-to-year gains in March through May 2013), declines in truck purchases were recorded in September through May. We see these trends continuing for a while longer. However, despite these challenges, we see firmer economic conditions and easier comparisons aiding sales trends by late 2013. In one of the recent press release, the weather conditions and its effect over DEs sales were addressed by its chief executives Samuel Alien:"Cool, wet weather in North America has delayed crop planting, slowed construction activity and hurt sales of turf-care equipment," Valuations and forecasts Our model is based on the expected long term growth at 6.9 percent per annum as observed through its recent five years earnings excluding the outliers with the reported results. The business demonstrates a relatively strong seasonal effect with the best sales in its second quarter which ends in May of each year. From the historical results, we could observe improvements across all quarters in each of the year since the economic turmoil in 2009. Earnings per share is expected to reach 16.85 in year 2022 based on the sated 6.91 percent annual growth. Having better earnings progressing each year, the current value of DE is relatively cheap among its peers with similar/smaller sizes. By assuming the future P/E will remain at the current level of 10.33 x, the estimated trading price ten years from now would be $172 per share, almost double of todays value. Combined with the expected dividends $27.55 per share, the total worth of a DE stock in the long term forecast will be $199.83 per share. We then employed our estimated require of returns 8.725 percent to value the future price back to 2013, which arrived to $86.57.

With the concerns of drought and slower than expected economic recovery, we have suppressed the annual EPS growth assumption so that we could factor in, some if not entirely, the negative conditions as outlined earlier.
Industrial Equipment Makers Company United Technologies Corp. Caterpillar Inc. Mitsubishi Heavy Industries, Ltd. "Private" MAN SE Deere & Company ABB Ltd. Illinois Tool Works Inc. CNH Global NV Komatsu Ltd. Parker-Hannifin Corporation "Private" Symbol Price Change Market Cap P/E

UTX CAT

99.99 88.17

0 0

91.92B 57.97B

14.97 11.89

DE ABB ITW CNH KMTUY

83.96 22.72

0 0

32.58B 52.17B

10.33 19.42

71.46 43.7 24.11

0 0 0

32.19B 10.62B 22.97B

12.14 8.8 14.32

PH

99.89

14.91B

15.55

Revenue Million 2013 2012 2011 2010 2009 2008

1Q 2Q 7,421 10,914 6,767 10,009 6,119 8,910 4,835 7,131 5,146 6,748 5,201 8,097

3Q -- 9,590 8,372 6,837 5,884 7,739

4Q -- 9,792 8,612 7,202 5,334 7,401

Year -- 36,157 32,013 26,005 23,112 28,438

Earning Per Share 1Q 2Q 3Q 4Q Year 2013 1.65 2.76 E2.12 E1.97 E8.50 2012 1.3 2.61 1.98 1.75 7.63 2011 1.2 2.12 1.69 1.62 6.63 2010 0.57 1.28 1.44 1.07 4.35 2009 0.48 1.11 0.99 -0.53 2.06 2008 0.83 1.74 1.32 0.81 4.7

 DE Intrinsic Value EPS expected 8.5 EPS Growth (Assumption) 6.91% PE 10.39 DIVIDEND PAYOUT 23% EXPECTED STOCK RETURN 1.09 Forecasted Stock Price in 2022 Earnings Per Share after the 10th year TOTAL DIVIDENDS Forecasted Stock Price in 2022+DIVIDENDS Net Present Value 172.27 16.58 27.55 199.83 86.57

Recommendations (Hold) Being the worlds leader in the farm equipment and construction machinery, DEs financial has been strong and it has been improving with better sales and profits in each of the year. And we see that DE has been making consistent efforts with capital investments, keeping its competiveness in the industry. However, theres been a large increase with borrowing activities in the 2012 fiscal year compared to 2011. Even though the principle values of these loans will decrease in the rising interest rate environment which we expect to come imminently, but the business is now facing tighter constraints toward its cash flow upon servicing the interests and repayments of these loans. Our overview of DE is positive, because it has a strong financial performance to support its trading price and that earnings have shown its progressive improvements in each of every quarter since 2009. However, our concerns for the recent drought and the slower than anticipated construction activities at a global level made us to remain conservative with DEs trading price level in the upcoming short term trading sessions. As a result, we put HOLD as our recommendation.