Great article, very well-thought-out and researched, thank you!
Do you think the move to electric tractors will affect the dynamics of the industry? For example, by requiring less maintenance, the importance of the dealer might decrease; fewer moving parts and maintenance, might mean less recurring revenue, etc. According to ChatGPT, electric tractor penetration rate is extremely low in US (higher in China) and not expected to increase rapidly.
Regarding the technology component, is it possible for an "equipment-light" company to produce the analytics, farm optimization, etc. without providing most of the equipment (no tractors, but let's say, only a sprayer that you hook to the tractor and the software so that it sprays only where needed)? Additionally, how much data is necessary to build a system that is 98% as good as can be? Whereas in self-driving cars the benefits of each accident averted are substantial and the wide variety of situations the car can encounter would suggest the incremental value of additional data takes a long time to plateau, I wonder if it's the same case here. In other words, maybe there's not much difference in how much the algorithm can learn between 10 acres of training data and 500 acres, suggesting the flywheel/moat might not be so strong. Lastly, traditional companies, like auto manufacturers, sometimes struggle to develop good technology. Would you know if there are many complaints? For example, tractors being out of service because of the software. The demos and videos are nice, but this does not always translate to software that reliably works.
Overall the article made me bullish on the company, but as Charlie Munger used to say "invert, always invert", good to think how the investment thesis might not play out as planned. Thanks again for the excellent write-up, I will most likely invest thanks to it. Un saludo!
Regarding Electric Tractors I don't think it'll bring a noticeable change to the industry. As you said the penetration is still low, and even when they come I'd like to think that Deere has already built a significant recurring revenue stream that is not as related to parts (for example subscriptions). I also believe that electric tractors might not require as many parts, but for sure they require maintenance. Long ways to go here in my opinion.
As for the equipment light concern...some companies like AGCO are doing that (only selling the retrofitting equipment) but obviously the experience is not the same because you don't have the same compatibility with the John Deere Operations Center, for example. As in most things technology-related, the compatibility between software and hardware is important + the fact that the equipment-light companies don't have all the data to come up with the best technology.
As for the data necessary to tweak the model I think that the recent experience shows that more data is very important to come up with a better model. Production and precision ag serves very large customers where even minor improvements in yield can have a very large impact on profits. Maybe this is not the case for smaller ag, but I'd say that a slightly better model in large ag makes the difference.
From all that I've read, technology at Deere has been working great and farmers are largely satisfied. Note here that they have not seen the input of technology in their farms for many generations, meaning that they don't really have much to compare it to. For example, the technology might not be perfect but you still save significantly on fertilizer. I've even read that Deere is bringing people from the FAAMG to work for the company, which honestly bodes well for the quality of the technology.
Thanks again for the comment and glad you enjoyed it!
Loved this write-up, and the best thing is that a lot of it tied up with my own research, which is a relief!
I hold 3 companies in this space, all of which you referenced - DE, CAT and AGCO. My logic is basically as you laid out - DE for North America with a bit of LatAm, AGCO for Europe and LatAm, CAT for Construction with a bit of DE overlap.
As with DE, CAT are another company whose debt looks high on paper, but is from their Financial Arm and their Operations are also robust.
What I like about AGCO is their agri-tech, but OEM-agnostic approach. Whereas DE are developing agri-tech for new machines and retro-fit to Deere machines, AGCO are developing retro-fit solutions intended for any/all OEM equipment. These strategies make sense for both companies, given their relative installed bases, as you suggest. I hope it may give AGCO a competitive edge, but if I were a Deere farmer, I would likely want Deere aftermarket equipment, too, so I don't think one company will eat the other's lunch.
The only comment I might make is that I personally believe a lot of the 2020 run-up was pent-up demand from COVID and stimulus cheques looking to find a home, so I'm not sure if that is inherent to the company's performance or not. I bought in 2021 and have seen very little return, but that's OK, because I'm here for the next few decades and, like you, I believe the future is bright for this company (and for AGCO, too).
So I stumbled across this article from a link in a FinChat email and I couldn't be happier. A really nice writeup on a stock I've been keeping an eye on for awhile. As you mentioned its been in a bit of a consolidation pattern over the last few years, which in addition to the high debt load, was another factor that was a bit of a turn off. I had heard about some of the tech involved with pesticide application and it was an amazing listen to hear how Deere was incorporating a SaaS model into their equipment (btw the Deere vids in the write up was a nice touch - particularly liked the Ops Ctr video). I'm still a bit on the fence as far as an investment but it seems to be at a nice value to dip in - just need to do some more research, especially on the debt side as I need to better understand the Finance vs other breakout of the debt structure. Great job and thanks again!
Thank you for writing this long article on Deere. I have a question for you if I may. On page 84 PDF version, You stated that DE generated about $47 bn in OCF and then you looked how DE allocated the cash flow: Capex, M&A, Dividends and Buyback the sum of which is $69.2 bn a cool $22 bn more than the company generated. This imply that debt went up about $22 bn in the period. Assuming my math is about right, this is not a great thing for a company because the business has much higher level of debt. Did I miss something here?
This is correct, the debt went up, but I wouldn't look at this as necessarily bad because the company's profits also got much larger, meaning that it can service a significantly higher level of debt without this meaning that the financial position is worse now.
Thanks for your prompt replay. My point is simply that the company today mathematically carries more financial risks because the debt was essentially used to buyback shares and probably achieve some management compensation targets. To some extent it calls into questions the rationale to exclude the financing debt from the operational debt. It seems to me that DE first finance the floor plan of its dealers (a key advantage as you pointed out) and the finance also the ultimate customers (the farm business or the farmer). Without it, some dealer may switch allegiance. If it works the same way as it does in Europe, the dealers are the one who benefits the most for service/part replacements, in the sense they are actually carrying out the work and charge for it, including a margin on the replacement part. Thank you again for your writing, I really learned a lot about the company. Best
Wow, great work! I've been following Deere closely since last year, and this is one of the best write-ups I've read. I'll feature this in the Friday Roundup, which will be shared later today.
Gran compañía y mejor artículo. Lo que más me echa para atrás es que me imagino la agricultura dentro de 10 años como roombas sembrando y recolectando automáticamente 24 horas al día...y no sé si esa tecnología puntera vendrá de la mano de Deere, Tesla o cualquier otra empresa. La compra de Wirtgen es muy buena. Trabajé un tiempo en el asfalto y la compra de piezas para el mantenimiento de las fresadoras tiene una recurrencia increíble. Y en su momento, todas directas desde la casa en Alemania. Un saludo
Muchas gracias por tu comentario! Mi opinion es que en el caso de que ese sea el escenario de la agricultura en 10 años, va a ser dificil para empresas sin la base instalada llegar a tener esa tecnología, ya que no tendrán los datos necesarios para poder desarrollarla.
So huge! Thanks! How many days it take to write all this? :D
Thank you! Write not so much, but to do the research it took quite a bit of time of course!
Aweomse podcast and deep dive. Keep up the awesome skme work.
Great article, very well-thought-out and researched, thank you!
Do you think the move to electric tractors will affect the dynamics of the industry? For example, by requiring less maintenance, the importance of the dealer might decrease; fewer moving parts and maintenance, might mean less recurring revenue, etc. According to ChatGPT, electric tractor penetration rate is extremely low in US (higher in China) and not expected to increase rapidly.
Regarding the technology component, is it possible for an "equipment-light" company to produce the analytics, farm optimization, etc. without providing most of the equipment (no tractors, but let's say, only a sprayer that you hook to the tractor and the software so that it sprays only where needed)? Additionally, how much data is necessary to build a system that is 98% as good as can be? Whereas in self-driving cars the benefits of each accident averted are substantial and the wide variety of situations the car can encounter would suggest the incremental value of additional data takes a long time to plateau, I wonder if it's the same case here. In other words, maybe there's not much difference in how much the algorithm can learn between 10 acres of training data and 500 acres, suggesting the flywheel/moat might not be so strong. Lastly, traditional companies, like auto manufacturers, sometimes struggle to develop good technology. Would you know if there are many complaints? For example, tractors being out of service because of the software. The demos and videos are nice, but this does not always translate to software that reliably works.
Overall the article made me bullish on the company, but as Charlie Munger used to say "invert, always invert", good to think how the investment thesis might not play out as planned. Thanks again for the excellent write-up, I will most likely invest thanks to it. Un saludo!
Thank you for your comment!
Regarding Electric Tractors I don't think it'll bring a noticeable change to the industry. As you said the penetration is still low, and even when they come I'd like to think that Deere has already built a significant recurring revenue stream that is not as related to parts (for example subscriptions). I also believe that electric tractors might not require as many parts, but for sure they require maintenance. Long ways to go here in my opinion.
As for the equipment light concern...some companies like AGCO are doing that (only selling the retrofitting equipment) but obviously the experience is not the same because you don't have the same compatibility with the John Deere Operations Center, for example. As in most things technology-related, the compatibility between software and hardware is important + the fact that the equipment-light companies don't have all the data to come up with the best technology.
As for the data necessary to tweak the model I think that the recent experience shows that more data is very important to come up with a better model. Production and precision ag serves very large customers where even minor improvements in yield can have a very large impact on profits. Maybe this is not the case for smaller ag, but I'd say that a slightly better model in large ag makes the difference.
From all that I've read, technology at Deere has been working great and farmers are largely satisfied. Note here that they have not seen the input of technology in their farms for many generations, meaning that they don't really have much to compare it to. For example, the technology might not be perfect but you still save significantly on fertilizer. I've even read that Deere is bringing people from the FAAMG to work for the company, which honestly bodes well for the quality of the technology.
Thanks again for the comment and glad you enjoyed it!
Loved this write-up, and the best thing is that a lot of it tied up with my own research, which is a relief!
I hold 3 companies in this space, all of which you referenced - DE, CAT and AGCO. My logic is basically as you laid out - DE for North America with a bit of LatAm, AGCO for Europe and LatAm, CAT for Construction with a bit of DE overlap.
As with DE, CAT are another company whose debt looks high on paper, but is from their Financial Arm and their Operations are also robust.
What I like about AGCO is their agri-tech, but OEM-agnostic approach. Whereas DE are developing agri-tech for new machines and retro-fit to Deere machines, AGCO are developing retro-fit solutions intended for any/all OEM equipment. These strategies make sense for both companies, given their relative installed bases, as you suggest. I hope it may give AGCO a competitive edge, but if I were a Deere farmer, I would likely want Deere aftermarket equipment, too, so I don't think one company will eat the other's lunch.
The only comment I might make is that I personally believe a lot of the 2020 run-up was pent-up demand from COVID and stimulus cheques looking to find a home, so I'm not sure if that is inherent to the company's performance or not. I bought in 2021 and have seen very little return, but that's OK, because I'm here for the next few decades and, like you, I believe the future is bright for this company (and for AGCO, too).
Great write-up, thank you.
This is a great comment thanks a lot for reading!
So I stumbled across this article from a link in a FinChat email and I couldn't be happier. A really nice writeup on a stock I've been keeping an eye on for awhile. As you mentioned its been in a bit of a consolidation pattern over the last few years, which in addition to the high debt load, was another factor that was a bit of a turn off. I had heard about some of the tech involved with pesticide application and it was an amazing listen to hear how Deere was incorporating a SaaS model into their equipment (btw the Deere vids in the write up was a nice touch - particularly liked the Ops Ctr video). I'm still a bit on the fence as far as an investment but it seems to be at a nice value to dip in - just need to do some more research, especially on the debt side as I need to better understand the Finance vs other breakout of the debt structure. Great job and thanks again!
Thanks a lot for this comment and glad you enjoyed it!
Thank you for writing this long article on Deere. I have a question for you if I may. On page 84 PDF version, You stated that DE generated about $47 bn in OCF and then you looked how DE allocated the cash flow: Capex, M&A, Dividends and Buyback the sum of which is $69.2 bn a cool $22 bn more than the company generated. This imply that debt went up about $22 bn in the period. Assuming my math is about right, this is not a great thing for a company because the business has much higher level of debt. Did I miss something here?
This is correct, the debt went up, but I wouldn't look at this as necessarily bad because the company's profits also got much larger, meaning that it can service a significantly higher level of debt without this meaning that the financial position is worse now.
Thanks for your prompt replay. My point is simply that the company today mathematically carries more financial risks because the debt was essentially used to buyback shares and probably achieve some management compensation targets. To some extent it calls into questions the rationale to exclude the financing debt from the operational debt. It seems to me that DE first finance the floor plan of its dealers (a key advantage as you pointed out) and the finance also the ultimate customers (the farm business or the farmer). Without it, some dealer may switch allegiance. If it works the same way as it does in Europe, the dealers are the one who benefits the most for service/part replacements, in the sense they are actually carrying out the work and charge for it, including a margin on the replacement part. Thank you again for your writing, I really learned a lot about the company. Best
Wow, great work! I've been following Deere closely since last year, and this is one of the best write-ups I've read. I'll feature this in the Friday Roundup, which will be shared later today.
Thanks a lot for this!
Gran compañía y mejor artículo. Lo que más me echa para atrás es que me imagino la agricultura dentro de 10 años como roombas sembrando y recolectando automáticamente 24 horas al día...y no sé si esa tecnología puntera vendrá de la mano de Deere, Tesla o cualquier otra empresa. La compra de Wirtgen es muy buena. Trabajé un tiempo en el asfalto y la compra de piezas para el mantenimiento de las fresadoras tiene una recurrencia increíble. Y en su momento, todas directas desde la casa en Alemania. Un saludo
Muchas gracias por tu comentario! Mi opinion es que en el caso de que ese sea el escenario de la agricultura en 10 años, va a ser dificil para empresas sin la base instalada llegar a tener esa tecnología, ya que no tendrán los datos necesarios para poder desarrollarla.
Un saludo!
Great write-up. Extremely thorough but still very engaging. Thought I knew the company pretty well but learned a ton.
Thanks a lot for taking the time to read it :)
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