Earnings Power Value (EPV) Without Adjustments

Compute Deere's Earnings Power Value (EPV) Without Adjustments First, making no adjustments, compute Deere’s earnings power value (EPV) using the current figures and again using the smoothed figures. Use Deere’s Annual Report and the table below to facilitate your calculations and answer question one & two. Current (2016) Smoothed Operating margin 0.084 0.118 Revenues 23,387.30 30,000 EBIT Depreciation charges 803.4 803.4 Capex 641.8 641.8 Excess depreciation R&D adjustments Adjusted EBIT Taxes 0.30 0.30 Adjusted NOPAT Net income from FIN Corp Total adjusted NOPAT Discount rate 0.08 0.08 EPV business operations Cash Excess cash (90% of cash) Debt 4,586.20 4,460 EPV of equity Values in millions of $US (except discount rate and taxes) Question 1 (select one) What is Deere's EPV without adjustments (using current figures)? o o $20,000 million to $21,000 million o o $21,000 million to $22,000 million o o $22,000 million to $23,000 million o o $23,000 million to $24,000 million Question 2 (select one) What is Deere's EPV without adjustments (using smoothed figures)? o o $34,000 million to $35,000 million o o $35,001 million to $36,000 million o o $36,001 million to $37,000 million o o $37,001 million to $38,000 million Question 3 Now that you have the tools to effectively analyze and value a company, Keep in mind that no two companies are the same. Every company you investigate is going to have company-specific issues and intricacies that need to be thought out and addressed. This is certainly the case with John Deere, which manufactures farm machinery. However, before we learn about the company, we first need to understand a little bit about farming. Compare the US net farm income to the food price index. Use the following websites as resources: 1. United States Department of Agriculture, Farm Income and Wealth Statistics (Links to an external site.)Links to an external site. [select “Value added by US agriculture (includes net farm income)"] 2. United States Department of Agriculture, Food Price Index (Links to an external site.)Links to an external site. Following your analysis, answer this question: What drives the net farm income? How can you explain the net farm income evolution since 2009? Question 4 Assess Deere's Position in the Market Use the following resources to determine the businesses in which Deere operates. o Deere’s annual report 2016 o John Deere's website (Links to an external site.)
Links to an external site. o Wall Street Journal's article: America's Farmers Turn to Bank of John Deere (Links to an external site.)
Links to an external site. Following your analysis, share your inputs. Hint: Ask yourself the following questions: • How does Deere sell farm equipment to farmers? • What type of farming is Deere involved in? • Does Deere just sell farm equipment? • Does Deere provide any other services for farmers? • How strong a market position do you think Deere has in each of its respective businesses? Geographically, where does Deere operate? Question 5 Identify Barriers to Entry for Each Segment of Deere Please perform a strategic analysis on Deere. Use Deere’s annual and the following table to help guide your analysis. Market (Local vs. global) Barriers to entry (High/Medium/Low) Manufacturing Repairs and Maintenance Finance Software Question A (select one) Does Deere have high, medium or low barriers to entry in the manufacturing segment? o o High o o Medium o o Low Question B (select one) Does the repairs and maintenance segment of Deere enjoy high, medium, or low barriers to entry? o o High o o Medium o o Low Question C (select one) Does Deere have high, medium or low barriers to entry in the finance segment? o o High o o Medium o o Low Question D (select one) Does Deere have high, medium or low barriers to entry in the software segment? o o High o o Medium o o Low Question 6 Deere's Two Businesses 2 Explore Deere’s annual to see how you could separate the equipment manufacturing business from the financing business. Share your analysis with your peers. Question 7 The Value of Deere's Intangibles How would you compute Deere’s largest three intangible assets: product portfolio, workforce, and brand? Share your analysis with your peers. Question 8 Compute Deere's Asset Value (AV) of Equity Based on Deere’s annual and the adjustments, put everything together and calculate its asset value of equity to answer below two questions. Question A (select one) What is Deere's book value of equity? o o $4476.2 million o o $6530.8 million o o $6520 million o o $3911.8 million Question B (select one) What is Deere's asset value of equity? o o $16,811 million o o $16711 million o o $16611 million o o $16661 million Question 9 Compute Deere's Earnings Power Value (EPV) Without Adjustments First, making no adjustments, compute Deere’s earnings power value (EPV) using the current figures and again using the smoothed figures. Use Deere’s annual and the table below to facilitate your calculations and answer the two questions below: Current (2016) Smoothed Operating margin 0.084 0.118 Revenues 23,387.30 30,000 EBIT Depreciation charges 803.4 803.4 Capex 641.8 641.8 Excess depreciation R&D adjustments Adjusted EBIT Taxes 0.30 0.30 Adjusted NOPAT Net income from FIN Corp Total adjusted NOPAT Discount rate 0.08 0.08 EPV business operations Cash Excess cash (90% of cash) Debt 4,586.20 4,460 EPV of equity Values in millions of $US (except discount rate and taxes) Question A (select one) What is Deere's EPV without adjustments (using current figures)? o o $20,000 million to $21,000 million o o $21,000 million to $22,000 million o o $22,000 million to $23,000 million o o $23,000 million to $24,000 million Question B (select one) What is Deere's EPV without adjustments (using smoothed figures)? o o $34,000 million to $35,000 million o o $35,001 million to $36,000 million o o $36,001 million to $37,000 million o o $37,001 million to $38,000 million Question 10 Compute Deere's EPV With Adjustments Now incorporate any depreciation charge adjustments and any research and development adjustments you deem reasonable into your analysis. Again, calculate the earnings power value (EPV) using both the current and the smoothed figures. Use Deere’s annual report and the table below to facilitate your calculations to answer below two questions. Current (2016) Smoothed Operating margin 0.084 0.118 Revenues 23,387.30 30,000 EBIT Depreciation charges 803.4 803.4 Capex 641.8 641.8 Excess depreciation R&D adjustments Adjusted EBIT Taxes 0.30 0.30 Adjusted NOPAT Net income from FIN Corp Total adjusted NOPAT Discount rate 0.08 0.08 EPV business operations Cash Excess cash (90% of cash) Debt 4,586.20 4,460 EPV of equity Values in millions of $US (except discount rate and taxes) Question A (select one) What is Deere's EPV with adjustments (using current figures)? o o $25,000 million to $26,000 million o o $26,001 million to $27,000 million o o $28,001 million to $29,000 million o o $29,001 million to $30,000 million Question B (select one) What is Deere's EPV with adjustments (using smoothed figures)? o o $40,000 million to $41,000 million o o $41,001 million to $42,000 million o o $42,001 million to $43,000 million o o $43,001 million to $44,000 million Question 11 Compute Deere's Distribution Yield Compute Deere's average distribution yield for 2015 and 2016. Use Deere’s annual report and the following chart to help guide you analysis and answer below two questions. 2015 2016 Share repurchases 2770.7 205.4 Issuance of common stock -172.1 -36 Dividends 816.3 761.3 Change in short-term borrowings -211.9 207.2 Proceeds from long-term borrowings -6.2 -173.4 Payments of long-term borrowings 214.2 72.8 Interest expense 272.8 250.5 Total distributions 3683.8 1287.8 Market cap 24,701.6 33,150 Short-term borrowings 464.3 249 Long-term borrowings 4,460.6 4,586.2 Cash 2,900 3,140.5 Enterprise value Distribution yield Values in millions of $US Question A (select one) What was Deere’s distribution yield in 2015? o o 10.8% o o 11.8% o o 12.8% o o 13.8% Question B (select one) What was Deere’s distribution yield in 2016? o o 2.7% o o 3.7% o o 4.7% o o 5.7% Question 12 Assess Deere's Rate of Growth Now, investigate the second ingredient of Deere's franchise value calculation: the rate of growth. • Should we be looking at the consolidated company or just Deere’s equipment operations? • What is Deere's revenue growth and operating profit growth rates from 2006 to 2016? • Do you think we should use a smoothed rate or the current growth rate? To complete this analysis, you will have to access multiple annual reports for Deere. Use the following links to access Deere’s past annual reports: • Deere's past annual reports (Links to an external site.)
Links to an external site. • Deere’s annual report 2016 Following your analysis, share your answers for the above three questions. Question 13 Compute Deere's Expected Rate of Return Putting everything computed so far together, compute Deere's expected rate of return. What is Deere's expected rate of return? (select one) o o 6% o o 7% o o 8% o o 9% Question 14 Does Deere Offer an Attractive Investment? After performing this analysis, share your views on the following questions: • Are you worried about multiple compression? Why? • Do you believe Deere is an attractive investment? If not, at what price would you consider purchasing Deere?