Lending Runs Like a Deere

In reviewing the financials of Deere & Co (DE), I was stricken by the growth in lending. Bill Gates, through his Cascade Investments, LLC, owns nearly 10% of the outstanding stock. In addition, his good friend Warren Buffett was a holder of shares from 2012 through 2016, during which time he made very little return. DE obviously peaked the interest of two clear thinkers and still holds the attention of one of them.

DE has a powerful brand which is even recognized outside the agricultural community. I was fascinated by DE early on because our family owned many of their tractors, including the "A" and the "B" models. We had other older tractors, such as Farmall and Allis-Chalmers, but John Deere had clearly won the day. But what really surprised me was that the other contemporary tractors were better than the "A" and "B," but John Deere's marketing had won out.

In some ways, it does not look like things have changed. DE is still dominating the US agricultural equipment category, but appears to be doing so on a "buy here, pay here" business model. While sales have dropped by over a third over the past few years, the use of DE's balance sheet for loans and leases has nearly doubled. During a period of dropping ag prices as credit naturally dries up, DE has pressed forward employing its own balance sheet to facilitate purchases and gain market share.

If the cycle shifts in the near term, DE will have made an excellent move. However, with global bumper crops, DE faces another year of low ag prices. Compounding the challenges of this cyclicality is DE's business model. Like the auto industry, DE has a structure in which dealerships capture consistently good profitability, while the manufacturer rides a "boom" and "bust" cycle. It will be interesting to see if Bill Gates' long term support or Warren Buffett's concerns end up more relevant.