Argus Upgrades Deere To Buy On Potential Margin Rebound

Argus has upgraded Deere & Company DE to Buy from Hold, saying that the company's margins will rebound in the next 2-3 years.

As a global manufacturing company, Deere is affected by trends in exchange rates and commodities, and those may be nearing their inflection points.

"Given the currency and commodity trends, Deere's earnings have been consistently declining for several quarters. But we think margins are near all-time low levels and will rebound over the next 2-3 years as conditions improve," analyst John Eade wrote in a note to clients.

However, the analyst cut his fiscal 2016 diluted EPS estimate to $4.10 from $4.19, citing that he expects weak agricultural commodity prices to continue to pressure sales of Deere equipments. Analysts' consensus earnings estimate stands at $4.11 a share.

"We note, though, that our FY16 implies a net margin of approximately 5.7%, well below the company's five-year average of 8.3% and not far from the 10-year low of 4.2%. Thus, given our outlook for the dollar and the recent upswing in commodity prices, along with our expectations that management will continue to focus on profitability, we are maintaining our FY17 diluted EPS estimate of $4.42. Our long-term earnings growth rate forecast is 7%," Eade said.

Deere shares have been relatively strong performers over the past quarter, rising 2 percent while the S&P 500 has declined 8 percent. Over the past year, they have underperformed, dropping 15 percent, while the broad market has lost 9 percent. In fact, the long-term Deere performance against the market has been weak, as the stock has declined 16 percent over the past five years while the S&P 500 has advanced 46 percent. The beta on the Deere shares is 0.80.

Deere shares closed Tuesday's at $77.14; Eade has a price target of $85.