Deere's Downturn Will Continue, Morgan Stanley Warns

• Deere & Company DE stock plunged 8 percent on August 21, trading at $77.69 after-hours.
• Morgan Stanley’s Nicole DeBlase has maintained an Underweight rating on Deere, while reducing the price target from $84 to $76.
• DeBlase believes that there may be 20 percent downside to the consensus estimate for FY16 EPS, as well as an 8 percent downside to the new price target of $76.

Deere’s shares came under pressure after the company reported its 3Q15 earnings and announced an unexpected 5 percent reduction in its full-year guidance to $1.8 billion. DeBlase pointed out that the guidance implied an EPS of about $0.65 in 4Q15, which represents 40 percent downside to legacy consensus forecasts.

The Morgan Stanley report noted, “Understandably, this led to concern over the FY16e outlook - and to this point, management noted that its implements early order program suggests another Y/Y decline in NA Ag equipment demand in FY16e (albeit not as severe as this year's ~40% decline in NA large Ag volumes).”

DeBlase said that it is still “too early” to get an insight into the prospects for combines, although Deere had indicated that the Ag & Turf segment will likely face another year-over-year decline.

Deere was “already acknowledging strong probability of another decline,” DeBlase stated, adding that “negative commentary around the combines early order program and guidance that suggests further downside to Street numbers presents further downside risk to the stock.”

The EPS estimates for FY15, FY16 and FY17 have been reduced from $5.86 to $5.45, from $4.68 to $4.04 and from $5.51 to $4.51, respectively.