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Executive Summary:
Cervus Equipment Corporation is a company that is heavily weighted in the agriculture sector, which is an area that appears to be on the verge of substantial growth, due to the global food crises.
But this Canadian company is well-diversified, and doesn’t just focus on the agriculture sector. Cervus is invested in construction equipment, industrial equipment and agriculture equipment. In the agricultural equipment arm of the operations, the company owns 21 John Deere dealerships, with 15 of those being in Alberta, British Columbia and Saskatchewan. Six are located in New Zealand. In the construction and industrial equipment portion of the company’s operation, there are 16 dealerships, seven Bobcat JCB, as well as CMI dealerships that are operating in Alberta. Nine Clark, Sellick, Doosan and Nissan equipment dealerships are in operation in Alberta, Manitoba and Saskatchewan. Approximately one year ago, in May 2012, the company bought 22 acres of land located near Calgary. Two months later, the company bought a 30 percent interest in a company called Windmill AG Pty Ltd, which is a John Deere agriculture dealer. Cervus also purchased a 45 percent interest in PPJ Investment Ltd, which is a real estate holding company. Last month, Cervus bought an 18.6 percent interest in Windmill AG Pty Ltd, in addition to the investment that the company already had in the firm. That company is located in Australia.
Assets
The company had $220 million in assets in 2012. It acquisitions in the past several years have substantially increased the amount of assets that the company has. In 2009, Cervus had $134 million in assets. That number increased to $143 in 2010, and then to $167 in 2011. Its last reported assets, in 2012, of $220 million, represent a 64 percent increase in assets over the four years. This steady increase in assets is largely attributed to the company making acquisitions. Many of these purchases have been overseas in countries such as New Zealand and Australia.
Financial Analysis
Cash Flow
While cash has increased in the last four years by 700%, from $1 million to $7 million, the company appears to have liquidated investments in 2011. In taking a look at the company’s balance sheet, it is obvious that the firm has $7 million in cash, whereas in 2009 it had $1 million. However, the short-term investments have likely matured: In 2009, the company had $13 million of short-term investments and only $3 million last year. That could indicate the company needed the funds to make an acquisition, or it could simply mean it didn’t see a lot of potential in publicly traded securities.
Something that is somewhat concerning with this company is the amount of accounts receivables it has. In 2009, the firm only attributed $16 million of its assets to accounts receivables, while last year that number was $36 million. This can be expected with a company that does a lot of business financing vehicles, but $36 million of $220 million in assets earmarked from accounts receivables is a substantial amount. Many of those accounts receivables will never be paid. Furthermore, much of the assets is attributed to inventory. In fact, $173 million is made up of items in inventory. That’s an increase from $89 million in 2009. This might not be a concern, due to the fact that the company likely needs a lot of inventory if it is making a lot of sales, which it is.
The company has more than doubled its sales in the last four years, going from $377 million to $734 million. That is a substantial increase and one that is very attractive. Many of the best companies have at least a 25% increase in revenue year over year. The jump in the last four years for Cervus represents about a 35% increase in each of those years. A number that makes that amount more attractive is the modest increase in operating expenses. In 2009, expenses were $361 million, which left an after-tax profit of $17 million. Net profit has increased to $25 million last year, after the $734 million in revenue and $700 million in expenses. That equates to a larger profit margin than what the company was realizing in the year 2009.
Liabilities
Liabilities at Cervus have kept to the relative pace as the increase in assets. The liabilities have gone up from $127 million in 2009 to $199 million last year. An alarming fact, however, is the $22 million in accounts payable, which is an increase from $0 in the year before. In 2010, accounts payable was $10 million and $0 in 2009. This is an indication that the company is making large purchases, but doesn’t have enough cash on hand to pay for the purchases right away. However, it could also mean that the company sees more value in keeping its cash and investing it, rather than paying the expenses immediately. That could be an indication that the firm is paying a low interest rate due to a high credit rating, which would be an attractive attribute in purchasing shares of this stock.
Shareholders’ Equity
The shareholders’ equity is about $203 million. It is important that any stock has assets that are in excess of the liabilities. With Cervus, the company has about twice as much worth of assets as it has with liabilities, and the percentage of assets over liabilities is increasing.
Viability of Sector
Not only is Cervus in a strong financial position, it is also in a sector that appears to be destined for nothing but profits in the years ahead. Agriculture-related stocks are likely going to experience a great demand in the years ahead due to the global food crises. This makes stocks such as Cervus, which is heavily invested in the agriculture sector, very attractive. In fact, the company sells the agriculture equipment that is needed to produce many of the crops that are distributed worldwide.
In his article published in National Geographic entitled “The End of Plenty,” Joel K. Bourne Jr. discusses the pandemic that people throughout the world face when it comes to meeting the challenges of finding enough food for sustenance. This article sheds a clear light on the struggles many people face and the types of action that can help address the issue, and Cervus could profit from an increased demand for farmed goods. Bourne puts clearly into perspective the privileges of people in developed countries and how the United States and countries like it compare to the devastation of living in a third-world nation. But his article isn’t just about the need for food in these places, it is also about the results of the overindulgences of those who lived in privileged nations. He sheds light on the current incompetence to harvest one’s own food from the land around them, and this has real consequences for suffering nations. This could lead to an increased demand for agriculture equipment.
Bourne mentions the skyrocketing price of food that Americans began to notice between 2005 and 2008. This brought the attention to Americans that the current way of growing, processing and delivering food to each American’s dinner plate isn’t the best way to live. The level of consumption has been too high, and the level of carryover stockpiles has decreased to an all-time low. This is because people have been eating more than what is produced, drawing on the reserves, limiting the supply and, therefore, increasing the price for food. The scariest bit of information is the rate at which the world is populating compared to the increase in food production. But the price isn’t only increasing for those in developed countries; it’s also going up for those who have a harder time affording food. In order to curb that problem, many need agriculture equipment to harvest their own crops. While those in developed nations have to dig deeper to pay for their mean, those in third-world nations have no choice but to stare at an empty plate, or learn how to farm.
One of the most devastating aspects to the fact that these needy people are unable to have food at a reasonable price, is that about 50 to 70 per cent of their money goes towards paying for food as it is. Now that these prices have increased by so much, many of them aren’t able to afford to spend any money on food. Despite the Global Recession, the prices that were seen around 2005 have been largely unchanged. If a massive recession can’t drop the prices, then not much can. However, an increased education in many of the struggling countries could lead to further demand for the equipment that is offered by Cervus. Perhaps the recession actually acted to simmer the price inflation down. Once the global economy fully recovers, those prices could be skyrocketing even more, and so could the demand for agriculture equipment.
The question remains about what the world can do with the rapidly rising costs. There is an increasing concern, given the fact that the world’s population is set to burst to over nine billion by 2050. In order to address the future need, there is a requirement for production to double by 2030. And nobody really knows what will happen if that outcome isn’t met. While there was a green revolution between the 1950s and 1990s, it would be difficult to repeat that trend, particularly with the increasing number of people demanding organically grown foods. This type of food is much less efficient than food that is grown with pesticides, as there is the need for much more land than what is needed with the latter option. The only reasonable option is stopping the Third World’s reliance on western nations for their food, and teaching them how to grow their own crops, potentially with Cervus’s equipment. Even if they don’t use the equipment, and increased demand results on the western farms, Cervus’s equipment will still be in increased demand.
The problem appears to have been persisting since our ancestors stopped hunting and gathering and started plowing and planning about 12,000 years ago. The number of people on the planet has increased at a comparable rate as the number of developments in creating options for eating. This means that as people become better at finding ways to produce food, the population will grow anyway, and take away any advantage that the growing innovation had created. For example, if food production increases, prices will drop and people in Third World Countries will be able to afford more food. This will increase the survival rate, which will increase the population – due to the very fact that those people are living into adulthood and living longer – by providing a greater opportunity for people to reproduce. Those new babies will be more likely to survive, and in turn they will go on to make babies of their own. As long as they are able to afford the food that is available to them, they will continue to reproduce at a rapid rate. This new batch of babies will demand food, raising price again – and so on.
The issue appears to have no end, and some nasty critics of creating more food supply have even said that such a production would increase the surplus population, such as what was depicted in Charles Dickens’ “The Christmas Carol.” So in an effort to ensure the greatest good for the greatest number of people, some might consider feeding all the needy only exacerbates the problem, causing people to grow up in misery. However, as long as there are mouths to feed, and the world population isn’t doomed to die out, every effort should be made to sustain the lives of as many people as possible, and teaching those in Third World countries how to produce food appears to be the way to feed themselves. People might wonder if Scrooge is right, and that there should have been an end to feeding everyone in every nation, but only the wickedest person would say that today needs to see the end to producing enough food for the Third World. But before it comes to that, a new way of food production needs to come on board to spur on the next Green Revolution, and that is through educating the Third World about how to produce their own food, ideally with Cervus’s equipment.
Product Category:
The Cervus product category is the agriculture and construction equipment supply industry.
Direct Competitors:
Cervus is in a unique position, because it is well connected with the John Deere name and operates several of the company’s dealerships. Other big-name agriculture and construction equipment manufacturers are sold by Cervus, and so it is only other equipment distribution companies that are the competition of Cervus. However, because Cervus offers much of the best equipment in the industry, it is only really a convenience factor that decides if a customer goes to Cervus or to another company.
Core Proposition
Cervus intends to attract business from people who want to construction and agriculture equipment. The company has continued to increase the amount of stores it has and it has also continued to diversity its product base, representing more and more companies and buying a stake in many retailers throughout the world, while opening its own international locations. The core proposition of being the go-to source for agriculture and construction equipment has driven the company to massive success and has led it to be known as an innovative company. Its value proposition puts its price in the competitive category. It wants to provide excellent quality equipment at a reasonable price.
Brand’s positioning
Cervus has consistently positioned itself as a leader in the distribution of agriculture and construction equipment. It has been heavily weighted in Canada, and has taken advantage over the recent years of the increase in construction following the global recession due to government incentives. All this was accomplished by being a leader in the stimulus package era that followed the global recession. In fact, much of the recent success of the company can be attributed to the increase need for agriculture and construction equipment. The company is continuing its pursuit of being a leader in the field and has continued to expand worldwide. Cervus is so used to being a leader in Canada, that it is now attempting to gobble up the competition in other countries as well. This is the position it has had, and it is the position that it wants to continue.
Brand’s differentiation points
Cervus differentiates itself from the competition by offering a hybrid of services. It offers both agriculture and construction equipment. When the company first came out, it was differentiated by the fact that it was the only a agriculture company that was delivering only to the province of Alberta. That has all changed and now it appears the company is ready to distribute to developing countries.
Brand’s relevance
Cervus is meeting the demand of its customers, not only among those who want agriculture equipment, but also to those who want construction equipment. There are very few complaints about the products that Cervus provides because it represents many of the best companies in the sector, which means that it is largely able to complete the requests and not be held accountable when the equipment malfunctions, as it is the companies that manufacture the equipment that are. This makes Cervus relatively immune to bad publicity, such as what has happened recently with Toyota due to equipment malfunctions.
Is Cervus a Buy?
In taking into account the rapid increase in revenue and the not as rapid increase in expenses, it appears Cervus is able to continue its trend of increasing profits. I would suspect the company is able to increase revenue to over $1 billion this year, which would be a major milestone. Another attractive piece of information is the fact that the company is expanding worldwide. In order for companies to really dominate their sector, they need to be able to do business throughout the world, and this is an area where Cervus hasn’t faltered. The current market price of the company is fair for its current assets and net profits. However, because there is an upward trend in not only the sector, but also in the financial books, the share price will likely increase at relatively the same pace as the profit margin. This stock is attractive to those who have a buy-and-hold strategy.
