Deere Signals the Worst Is Over, Yet Wall Street May Need More

(Bloomberg) -- The worst may may be over for Deere & Co as its outlook for 2018 indicated a long-awaited recovery in demand for its tractors and agriculture equipment. Analysts cheered the inflection and investors rushed in, sending the stock up almost five percent to a new record high. Optimism on broader industry trends also boosted shares of peers AGCO Corp, CNH Industrial NV, Lindsay Corp and Titan International Inc.

While Deere shares rallied at the open, William Blair analyst Lawrence De Maria cautioned that some of the enthusiasm may temper over the course of the day as it is "difficult to continually give a positive surprise." The company is expected to expound further on market trends at it conference call which began at 10:00 a.m. ET.

Goldman Sachs, Jerry Revich

(Buy, Price Target $165)

Fourth-quarter results "revealed an inflection in the agricultural equipment capex cycle and improved operating leverage."

“The outlook comments reinforce our view of a normalization in new agricultural machinery share of total farmer capex, with Deere’s large equipment early order program pointing to five percent to 10 percent U.S. & Canada agricultural equipment retail demand growth despite flat total farmer capex.”

“On operating margins, the fourth-quarter beat versus FactSet consensus and 2018 outlook comments that point to minimal SG&A growth reinforce our view of structurally higher margins in this cycle.”

Baird, Mircea Dobre

(Outperform, Price Target $155)

“Solid guidance should move shares higher against a backdrop of continued demand recovery and a boost from seasonal tailwinds.”

“Our recent upgrade based on large agricultural demand recovery despite still low crop prices is supported by management’s expectations for five percent to 10 percent growth in U.S. and Canada agricultural equipment market in FY18, attributed to higher demand for large equipment.”

Stifel, Stanley Elliott

(Buy, Price Target $135)

“Deere reported a solid quarter against lofty expectations.”

“Equally important, these trends continue into next year as Deere’s large ag piece of the business remains in recovery mode.”

Jefferies, Stephen Volkmann

(Hold, Price Target $125)

“The quarter benefited from pricing and an FX tailwind with incremental margins of 20 percent in the quarter.”

“Deere is managing its business much more profitably than in past cycles, and end markets appear to be showing some signs of stabilizing.”

“Deere’s forecast for modest end market growth despite weaker farm fundamentals in FY18 will be a topic for the conference call.”

William Blair, Lawrence De Maria

(Market Perform)

“Expectations had risen into the quarter based on production data and retail sales for ag and turf, and a beat was expected. Therefore, the quarterly performance was solid, yet not much of a surprise."

“Guidance for fiscal 2018 is very strong for the entire company and by segment as well.... Guidance is more important than the quarterly print, and therefore should be supportive for the stock, and for other names such as AGCO, Titan and CNH.”

“As expectations move higher, it becomes difficult to continually give a positive surprise. Therefore, there could be some tempering of enthusiasm given the reset to 2018 after today pending what the company says on the on the 10 a.m. ET call.”

Melius Research, Rob Wertheimer

(Neutral, Price Target $129)

“Deere’s outlook makes sense on recent data, but Wertheimer does not "think a new cycle is here.”

“Recent indicators have been better, with Agricultural Equipment sales in October up strongly. That’s not likely to be a sustainable trend though, based on the used market.”

“As to fourth-quarter results, they were mixed. Incremental margins at agriculture and turf of 21 percent were weak on sales up sharply, up 22 percent, but last year’s hard to understand high margin on falling sales made for a difficult comparison.”

To contact the reporter on this story: Esha Dey in New York at edey@bloomberg.net.

To contact the editors responsible for this story: Arie Shapira at ashapira3@bloomberg.net, Morwenna Coniam

©2017 Bloomberg L.P.