News

Dec 20, 2023

Caterpillar or Deere: Which Is the Better Investment?

It could be argued that Deere & Co. (NYSE:DE) and Caterpillar Inc. (NYSE:CAT) have a virtual monopoly on the farm and heavy construction equipment market. While there is some overlap in the equipment

It could be argued that Deere & Co. (NYSE:DE) and Caterpillar Inc. (NYSE:CAT) have a virtual monopoly on the farm and heavy construction equipment market. While there is some overlap in the equipment offered by these companies, each dominates separate industries. However, both have incredible brand power and financial metrics.

About Deere

Deere & Co., commonly known as John Deere, is a leading global manufacturer of agricultural, construction and forestry machinery, diesel engines, drivetrains (axles, transmissions, gearboxes) and precision agriculture technology. The company was founded by John Deere in 1837 and has a strong global presence, with manufacturing facilities in the U.S, Europe, Asia and South America. The companys products are distributed through a vast network of dealers, distributors and retail outlets worldwide. Collectively, these added up to nearly $52 billion in revenue during 2022.

CAT 15-Year Financial Data

The intrinsic value of CAT

Peter Lynch Chart of CAT

That said, Deere generates the bulk of its revenue (86%) from two primary business segments, Agriculture & Turf Equipment at $34 billion and Construction & Forestry Equipment at $11.3 billion.

The Agriculture & Turf Equipment division is the largest business, accounting for 65% of total revenue. This segment includes the sale of tractors, combines, harvesters and other machinery used to plant, cultivate and harvest crops. The Construction & Forestry Equipment unit accounts for 21% of total revenue. This segment includes the sale of backhoes, excavators, loaders and other machinery used to build and maintain roads, bridges and other infrastructure.

The two other services are worth billions to the company as well. The Financial Services segment accounted for 6% of total revenue, or $3.2 billion in 2022, providing financing and insurance products to Deere's customers. The Other segment accounted for 8% of total revenue, or $4.1 billion, and includes the sale of parts, services and other products and services.

About Caterpillar

Caterpillar Inc. (NYSE:CAT), often referred to simply as "CAT," was created nearly 100 years after Deere in 1925 through the merger of the Holt Manufacturing Co. and the C. L. Best Tractor Co. Today, the company's products are used in a variety of industries, including construction, mining, energy, transportation and agriculture. The revenue breakdown is pretty straightforward, all told adding up to $59.40 billion during 2022.

Machinery is largest source of revenue for Caterpillar, accounting for approximately 70% of total sales. The company sells a wide range of machinery, including construction equipment, mining equipment, diesel engines and natural gas engines. Engine sales account for around 15% of total revenue.

Finally, Caterpillar has a variety of related products and services, accounting for roughly 15% of total revenue.

What's the difference?

While Caterpillar and Deere may sell similar products, the companies are industry leaders by addressing completely separate markets with notable differences that distinguish them.

One of the most significant differences is in agricultural equipment. Deere is a leading manufacturer of agricultural machinery, offering products such as tractors, combines, cotton harvesters, balers, sprayers, planters, tillage equipment and mowers. Caterpillar, on the other hand, has a more limited agricultural product line, primarily offering Challenger tractors and some hay and forage equipment.

Deere also has a dedicated forestry equipment segment, which includes products like forwarders, skidders, feller bunchers and knuckleboom loaders. Caterpillar does offer some forestry equipment, but has a more limited range.

While both Caterpillar and John Deere manufacture construction equipment, their product offerings differ slightly. Caterpillar has a more extensive range of construction machinery, including products such as motor graders, pipelayers and paving equipment, which are not part of Deere's core product lineup. Deere, on the other hand, focuses primarily on equipment like excavators, backhoes, wheel loaders, dozers and compact equipment. One caveat is that in 2017, with its acquisition of Wirtgen, Deere became a more prominent player in this segment behind Caterpillar and Komatsu. Long term, Deere is not likely to surpass Caterpillar, but the acquisition could take market share away from it.

The bottom line is that these companies cater to different end users for the most part and have distinct brand identities. Caterpillar is known for its dominance in the heavy construction, mining and energy sectors, whereas Deere is primarily recognized for its agricultural and landscaping equipment.

Brand dominance

Caterpillar has consistently delivered reliable, top-quality products to its customers, offering the lowest overall cost of ownership throughout its history. This commitment to excellence has placed Caterpillar as one of the world's most valuable brands. The company is well-positioned to benefit from favorable trends in the construction sector with a huge gain from the $1.2 trillion U.S. infrastructure deal, as the nation faces a significant backlog of road construction projects. In the energy industry, the rebound in oil prices since the Covid-19 floor should prompt exploration and production companies to boost capital spending, which is good news for Caterpillar's oil well servicing products.

As for Deere, the same bio applies and so does a wide economic moat with strong durable competitive advantage. The companys dealer network is a huge differentiator, distributing products and proprietary aftermarket parts and services across numerous regions. With over 2,000 dealer locations in North America and around 3,700 worldwide, the company has a significant presence on every continent. More importantly, dealers are typically large organizations dedicated solely to selling Deere products. It would be nearly impossible for anyone, let alone upstarts, to replicate the scope and coverage of this network.

Financial dominance

Caterpillar and Deere are boring companies. Neither will produce 10 times returns. However, they will not destroy shareholder value either. Both have nearly the same market capitalization, gross margins, return on equity and forward earnings multiples. Since 2001, Deere has driven annual revenue up from $13.8 billion to $55.6 billion. Caterpillar has a similar story, growing sales from $20.4 billion to more than $59 billion since the turn of the century.

Deere has a slight advantage in terms of growth potential and current net profit. On the bottom line, it generates $38,000 more per employee, which translated to $8.2 billion in the last 12 months versus Caterpillars $6.7 billion. However, Deere carries significantly more total debt - $55.6 billion versus $37.5 billion.

Further, both companies have paid out dividends for 33 straight years and Caterpillar has recorded 29 years of dividend growth. For me, it is a toss up, which is why investing in both stocks would make the most sense.

This article first appeared on GuruFocus.

Related Quotes