Seeing "rapidly deteriorating" fundamentals in U.S. agriculture, JPMorgan analyst Ann Duignan downgraded Deere (DE) to Underweight, a sell-equivalent rating. Global markets are over-supplied and Chinese demand for soybeans is likely to decline "significantly," she contended.
SELL DEERE: In a research note to investors, JPMorgan's Duignan downgraded Deere to Underweight from Neutral and lowered her price target on the shares to $132 from $154 as she sees "rapidly deteriorating" fundamentals in U.S. agriculture. Beyond tariffs, which have weighed on U.S. soybean exports in 2018/2019 to date, Chinese import demand for soybeans is likely to decline significantly as it deals with a 30% reduction in its hog herd following the outbreak of African swine fever, she contended. Further, the analyst noted that Brazil and Argentina combined have produced close to record soybean and corn crops this season, while U.S. dollar strength remains a headwind for U.S. competitiveness on the global market. Additionally, she sees the Midwest off to a "very slow" start in 2019/2020, as potential yield losses from delayed planting are weighing on sentiment.
Overall, "this is a perfect storm for U.S. farmers" and the fundamentals for Deere are now skewed to the downside, Duignan contended. The analyst also upgraded Agco (AGCO) to Overweight from Neutral as she sees the recent selloff as "overdone" given its "limited exposure" to the U.S. row crop sector.
MOVING TO THE SIDELINES: On Monday, Baird's Dobre downgraded Deere to Neutral from Outperform, telling investors that large Agriculture equipment demand is increasingly at risk as farmer sentiment and grain prices deteriorate amid the drawn-out trade war. Fundamentals have weakened as 2019 progressed, the recent trade flare-up is likely to further weigh on farmer sentiment, stalling the equipment demand recovery, he contended. Moreover, the analyst pointed out that dealer inventories have risen, posing an additional risk, while construction equipment growth is moderating. Deere continues to trade at a meaningful premium to peers which could prove untenable in this environment, he added, lowering his price target on the shares to $150 from $166. The analyst also downgraded Titan Machinery (TITN) to Neutral from Outperform, citing similar concerns.
PRICE ACTION: In late morning trading, shares of Deere have gained about 1% to $147.74.