Weakness in U.S. farm equipment sales, based on weaker commodity prices in the years ahead, are at the heart of a downgrade that sent Deere and Agco stock lower Wednesday.
Shares of Deere (DE) were down 3% to $87.82, while Agco (AGCO) dropped more than 4% to $50.85, after Analyst Andrew Casey at Wells Fargo lowered his ratings to Underperform from Market Perform on each stock.
Casey reduced his price target range for Deere, to $72-75 from $90-93, and said he lowered his outlook for fiscal 2014 and 2015 U.S. large farm equipment demand as commodity prices return to normal along with growing conditions, and because of moderating corn-based ethanol consumption in the U.S. �He writes:
“[Deere] stock can be pressured in two ways: (1) DE�s stock price tends to be�influenced by corn prices, which we expect will decline in an anticipated mean�reversion crop and an exit from a once-every-30-year price spike, and (2) with a�bearish view of 2014 and 2015 equipment demand, we now expect substantial�downward estimate revision potential. … Dealer channel checks suggest uniform dealers concern about a 2014 demand drop if corn falls beneath $5.50, and in our view, this is a major concern for DE�s earnings given a current heavy reliance on this market for volume of high margin large farm equipment.
Compounding the company�s issues in addition to lost overhead absorption are�incremental margin headwinds from emissions regulation cost per unit and�global growth initiatives.
we are maintaining our fiscal 2013 estimate of $8.55 (consensus�$8.54), decreasing fiscal�2014E to $8 from $9.05 (consensus $8.99) and introducing�fiscal�2015E $6.90 (consensus $9.89). “
Wells Fargo’s analysis of corn prices since 1876 shows that corn prices rise historically, but trends presage a 2014-2016�correction�of roughly 40% from the current price of $7.28 per bushel to $4.25 on average.
Wells Fargo
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