Goldman Sachs Upgrades Deere & Co., Moves Machinery Coverage To 'Cautious'

In a report published Monday, Goldman Sachs analyst Jerry Revich upgraded the rating on Deere & Company DE from Sell to Neutral, while raising the price target from $78 to $94, even while lowering the Machinery coverage view from Neutral to Cautious.

Analyst Jerry Revich said that there seems to be more than 15 percent downside to consensus estimates in Machinery as well as potential for multiples to compress by 15-20 percent to prior cycle levels. The compression is likely to be driven by:

1. “An extended deflationary recession in end markets that account for over 50% of Machinery sales,
2. Rising price/ currency pressures, and
3. Risk of further machinery capex reductions to prior commodity exploitation cycle levels.”

Referring to Deere, Revich said that the Sell thesis was based on:

1. “A challenging multi-year outlook for ag equipment capex
2. High operating leverage driven by challenging used equipment (trade-in) values and mix.”

Although ag equipment demand has declined below the initial expectations, Deere has achieved higher-than-expected margins, due to “surprisingly strong pricing and benefits from lower raw material costs.” Deere realized a 2 percent price increase last quarter against a tough backdrop. Revich expects Deere to benefit from the continued decline in steel in coming quarters.

In the report Goldman Sachs noted, “We remain negative on the end market outlook for ag equipment capex driven by weak farmer income and peak capital stock, but we acknowledge that Deere’s ability to improve margins through the downturn is contrary to our investment case.”

Moreover, Deere’s shares have risen only 6 percent since mid-May, as compared to a 25 percent rise in the S&P 500.