My investment thesis is Deere & Co (DE) or better known as John Deere.

Deere was founded 176 years ago by you guessed it John Deere. John Deere is the global leader in agriculture machinery manufacturing and is comprised of the following three divisions: Agriculture and Turf (A&T) Construction and Forestry (C&F) Financial Services

Agriculture and Turf manufactures tractors, combines and lawn equipment. A&T account for 77% of Deeres earnings. Construction and Forestry manufactures dump trucks, loaders and a full complement of forestry equipment. C&F account for 9% of Deeres earnings John Deere financial services provides financing to dealers and customers for the purchase or lease of Deere equipment. Financial Services provide 14% of the companys earnings. I approach this investment thesis with a very Buffett style analysis. I will qualitatively assess the barrier to entry, recession resistance, inflation resistance, rate of change of the industry, management and finally industry head winds and tailwinds. I will quantitatively asses past performance, balance sheet strength and compare these results to the competition. I will use conservative estimates of future profitability to arrive at an estimated return on investment.

Is Deere Recession resistant? Deere remained profitable through the worst of the 2008 recession. Earnings per share did drop over 50% from the previous year, but were still able to achieve a 16% ROE. Deere will be negatively affected by severe economic downturns but people will always need to eat and the company should be able to perform better than most. Is Deere Inflation resistant? Buffett has written at length about what makes a business inflation resistant. According to Warren it boils down to a high return on unleveraged tangible assets. If a business can increase prices in line with inflation and avoid having to purchase new operating assets at the inflated prices it will perform better during inflationary periods. Deere consistently achieves better than a 25% pre tax operating return on operating assets which is well above average and should allow them to perform better than most when faced with high inflation. Is Deere Easy to understand?

Agriculture, forestry and construction equipment have not changed dramatically in the last 50 years, although emissions systems, control systems and implement technology do need to be on the cutting edge. This industry may not be as predictable as chewing gum but is nowhere close to computer chips. Does Deere have a Barrier to entry? The tattoo test: One of the checks I like to make in relation to the strength of a brand is whether someone is willing to tattoo it on themselves. A google image search for John Deere Tattoo reveals that plenty of men and women have indeed inked themselves with the iconic leaping deer. Intergenerational recognition: I like to check with my nephew, sisters, girlfriend, mom and dad and grandparents to see if they recognize the brand and can identify the core business. In the case of Deere they all could despite none of them having any farm exposure. John Deere green is a color. John Deere green is the name of a country song. Deere T-shirts and hats are proudly worn in public. Dealer network: Deere has a dealer network that is second to none. This is important since sales, service and parts are essential to the people who operate the equipment. Research & Development: Deere equipment is considered to be on the cutting edge and in 2012 spent $1.4B on R&D. Deere spent as much on R&D in 2012 as AGCO and CNH (2 closest competitors) made in combined net income that same year. Coma test: I like to ask myself if I were to wake up from a coma in 10 years, would I be confident that Deere would still be the market leader in Ag equipment. The answer to this question is yes.

Does Deere have competent Management Deere adopted a Shareholder Value Added (SVA) model in 2001. This model was put in place to monitor and increase the return Deere was achieving on assets. The SVA model is defined as the difference between operating profit and pretax cost of operating assets. Equipment operations are assessed a pretax cost of assets of 12% and financial services is assessed a pretax 15% cost of equity. This means that management feels theyve destroyed value if they achieve anything less than pretax 12% on assets in the equipment business and 15% pretax return on equity in the finance business. This is very rare to have a management team aware of and striving to increase the return on the assets they employ. SVA has increased from negative $1.2B in 2001 to positive $2.6B in 2012. Deere management is also acutely aware of how they allocate cash from operations with the intentions of a strong balance sheet while returning as much value to shareholders as possible. The priorities for cash in order are: Credit rating (maintain A rating) Fund value creating investment in the business

Dividends Share buybacks (only when price is low enough), currently reducing share count by about 5% per year

The operational efficiency of the business has increased over time as evidenced by: Since 1998 has managed to triple sales while decreasing trade receivables Net sales per employee has increased at a 6% CAGR over the past 30 years

Financial History Balance sheet Zero net debt on the equipment operations side (Cash - Debt = 0) Financial services: $34.5B assets, $30.6B Liabilities, $3.9B equity (equity = 11.3% of assets)

Financial Services Loan Quality Write offs have equaled 30 basis points of portfolio on average over the last 8 years (this is very low) Write offs kept very low since large down payments are required and the equipment has a high resale value. This results in a situation where the value of the outstanding loan is less than the resale value of the equipment, if the equipment was repossessed it could be sold for more than the value of the outstanding loan. Deere has a history of being a very conservative lender.

5 Year Historical Revenue Growth per Region 9% CAGR US and Canada 18% CAGR Central and South America 2% CAGR Western Europe 21% CAGR Asia, Africa and Middle East 11% CAGR Central Europe and CIS 20% CAGR Australia and New Zealand

10 Year Analysis EPS growth of 16% CAGR Revenue growth of 9% CAGR Average ROE of 30% (44% average for the last 3 years)

Competition

Deere's most significant competitors are AGCO and Case New Holland (CNH). I went through the same qualitative analysis of these two brands as I did at the start of the write up and found that neither of these brands are as recognizable or iconic as Deere. If as I suggest Deere is truly an exceptional brand this should show up in a quantitative analysis of past financial results, especially operating margin and return on equity. This analysis reveals that Deere's 10 year average ROE is equal to 30% while AGCO averaged 11% ROE and CNH average 4% ROE in the same 10 year period. In regards to operating margin Deere has returned a 13% average operating margin over the last 10 years, while AGCO averaged a 5% operating margin and CNG averaged 7% during the same 10 year period. Part of the reason for the exceptional performance is that Deere is such a strong brand it can grow it's own brand organically where the others typically grow through acquisition. These acquisitions typically occur at large multiples to tangible book where organic growth occurs at book value.

Capital Spending Capital expenditures for equipment operations totaled $1.35B in 2012 against a provision for depreciation of $0.55B. This means that in 2012 Deere invested $800 million into the business above and beyond depreciation. Capital spending well in excess of depreciation has been consistent over the past 5 years. These expenditures are to improve existing locations as well as to expand the business. Deere lists the following countries as locations of significant investment. US and Canada EU 27 Brazil CIS (former Soviet Union) China India

Large capital expenditures in businesses that make below average returns on equity are seen as value destroying and something an investor should desire to avoid. As previously mentioned, Deere has averaged 30% return on equity over the last 10 years and above 40% ROE in the last 3 years. Since Deere retains earnings and reinvests at such high returns, investors should feel encouraged when Deere is making significant capital expenditures. Warren Buffett has been quoted saying that time is the friend of the wonderful business and it is the retention and reinvestment of earnings at above average returns that provides so much value to shareholders that stick around for the long term.

Is the industry experiencing tailwinds It is my belief that the Ag and Construction equipment industry are facing strong tailwinds for the following reasons:

Growing global population (we all need to eat) Increasing wealth in developing countries (diets that include meat require more crops) Migration from rural to urban living in developing countries results in larger mechanized farms and the need for infrastructure creating construction equipment Less water for irrigation Developed countries moving to larger operators and away from family run farms. This results in the need for more equipment that needs to be replaced more frequently.

Endorsements Deere was first revealed as a Berkshire Hathaway holding in a 13F released on Nov 14 2012. The holding is about $400 million and due to its size was probably purchased by Todd Combs or Ted Weschler.

Valuation To value this investment I will assume that the company grows earnings at 12% for the next 5 years. This will represent 8% earnings growth and 4% share repurchase per year. These assumptions are conservative due to the level of retained earnings and the historical ROE as well as Deere's history with share repurchases. I will also assume that the dividend increases in line with earnings resulting in a constant payout ratio. I will assume that in five years the global macroeconomic fears will have subsided and the market will acknowledge that Deere is a well above average business and assign it an above average earnings multiple. I will assume a PE ratio of 17.5 which is conservative based on historical levels. Assuming a purchase price of $91 and using the assumptions listed above, this investment will return 24.5% CAGR with no margin of safety or 19% CAGR with a 25% margin of safety.

Conclusion When talented value oriented management couple with an iconic brand in an industry facing strong tailwinds good things are bound to happen. This investment is what Warren Buffett would refer to as a wonderful business at a wonderful price. The value will be realized over time by allowing this company to retain your earnings and invest them in projects returning over 40% per year. Also over time the market will take note of this well above average business and assign it an above average earnings multiple, resulting in a double dip (earnings growth and multiple expansion).