Barclays Is Raising Its Deere & Co. Estimates

• Deere & Company DE shares have gained 6 percent in the last 5 trading days, climbing from around $75 to above $79.
• Barclays’ Robert Wertheimer maintained an Underweight rating on the company, while raising the price target from $63 to $65.
• Estimates have been raised to reflect lower pension expense on Deere's pension accounting change, Wertheimer said.

The EPS estimates for 2016 and 2017 have been raised by about 15 cents each year to $3.65 and $2.90, respectively, to reflect lower pension expense on Deere's pension accounting change. Although this results in an upward revision of the estimates of about 40 cents, this is offset by decrementals as per the company’s recently issued outlook, analyst Robert Wertheimer said.

What is more significant for Deere’s shares is whether 2016 will be a trough and how the expected rebound in 2017 would take shape. In this context, it is important to look at used equipment.

“Most of the peak tractors sold in 2011-2014 have not yet traded into the used market and we believe the sharply elevated leasing in the used market indicates the used buyer is already balking at the prospect of owning more/newer equipment. With most of the supercycle yet to be placed into the used markets therefore, we think several years of lower sales are ahead,” Wertheimer commented.

He added that credit sub income may be expected to decline for the next several years, even if residual revaluations do not significantly impact earnings.

In 2015, the fleet on farms in the US got younger. “In fact at one of the larger moves on record for the 100+ horsepower category, and moderately younger for higher horsepower units. 2016 will therefore be the first downcycle year for fleet units dynamics.”

The surge in productivity and horsepower per unit in both tractor and combines translates to higher productive power delivered to farms in 2016 than ages out.

“In short then, our view is that 2016 is not trough, that 2017 may or may not be close,” the Barclays report stated, while adding that more downside to trough can be expected, along with “a longer path back up to normal than consensus.” Wertheimer therefore believes that it is “still too early to buy for value.”