Deere & Co.: How it Makes Money (TTC, AGCO)

Forever identified with its signature green tractors, Deere & Co. (DE) is one of the oldest manufacturing firms in the S&P 500. Deere & Co. has been around longer than just about any business in any non-financial industry in the United States today.

Named after its 19^th century founder, the Moline, Illinois,-based Deere & Co. (“John Deere” is just the brand name) is the largest agriculture machinery manufacturer on Earth. While famous for farm equipment – harvesters, combines, tractors, and more specialized vehicles – the firm also makes scores of construction vehicles, not to mention its consumer-class lawn mowers and snowmobiles. 

Farming (along with its more romantic cousin, ranching) can be argued is one of the most important occupation in existence, for hopefully self-evident reasons. Deere & Company was founded in the 1830s, which means it was there for the most remarkable demographic shift in human history: the post-Industrial Revolution mass movement of the population from subsistence farming into a wide variety of other pursuits. To summarize, when Deere & Co. was founded, all but one or two percent of us were farmers. Today, all but one or two percent of us aren’t. While Deere & Co.'s customer base might have reduced in that time, the need for its notably reliable products hasn't. With each remaining farm operation becoming more and more productive on a per-acre and per-person basis, specialized equipment that can reduce wrapping time fourfold or bale in half-ton increments is a necessity, not a luxury. Well attuned to achieving peak yield and efficiency, producers will pay up for new equipment. 

Deere & Co. earnings have decreased over the past year, a phenomenon the firm attributes to “a weakening farm economy.” In 2016, it had a net income of $1.5 billion, a decline of nearly 50% since 2014. To cope with this, Deere & Co. is expanding into construction in the forestry segment. Most recently, it acquired the German road construction maker, Wirtgen Group for $4.89 billion. This came a month after a deal to buy Monsanto Co.'s (MON) Precision Planting LLC fell through due to resistance from the justice department because of antitrust concerns, according to the Wall Street Journal. 

The company’s three major segments are agriculture and turf; construction and forestry; and the unexpected wildcard, financial services. Really? Indeed. Deere & Co. discovered that it could make almost as much money financing its products as selling them. It isn’t the first vehicle company to figure this out, either. General Motors Co. (GM) created GMAC, the General Motors Acceptance Corp. (now Ally Financial [ALLY]) for similar reasons. Deere & Co. has traditionally had other methods of making money without getting its fingers dirty, too. Crop insurance was a profitable sideline for the company for many years, until it entered into an agreement to sell such operations this year. (For more, see: Dealer Financing.)

Most of the recent reduction in Deere & Co. equipment operations profits occurred in the United States and Canada. While Deere & Co. operates in dozens of overseas countries, primarily in Western Europe, Russia, China, Australia/New Zealand and South America, it’s expedient for the firm to separate its operations geographically into just two segments: the United States and Canada, and everywhere else. (For more, see: Top 3 Agricultural ETFs for 2017.)

Deere & Co. is inextricably identified with tractors and other farm equipment, almost to the point of trademark genericization. Competition might be fierce, but not so fierce as to run this 178-year-old stalwart out of business.