Correction May Not Materialize
Analyst Brett Wong believes even if the downturn persists, investors will just push out valuations another year. The analyst sees ongoing headwinds in the agricultural space into 2017 and 2018, with no key drivers to turn the cycle outside of a weather event. However, the analyst does not expect the correction he had expected previously to materialize.
Cycle Heading Toward Bottom
Piper Jaffray noted that the better-than-expected 2017 guidance from Deere & Company DE, thanks to cost cuts and a backdrop that is getting incrementally less negative, has lent credence to market expectations that the cycle is bottoming out.
Unfavorable Supply And Demand
Piper Jaffray thinks it is early to be calling the bottom and a recovery, with minimal catalysts expected for the companies over the next few months. In fact, the firm expects the fundamentals to get worse in 2017, given a large expected corn and soybean crop out of South America and its expectations that there is minimal acreage shift next season in the United States supporting another large North American crop. The firm also believes demand is at risk, with grain prices and in turn profitability of farmers coming under pressure.
However, the firm believes 2018 will see less degree of declines than in 2017, as the bottom is closer. Additionally, the firm believes the cost focus of the companies would support earnings recovery.
Machinery Demand To Remain Weak
Piper Jaffray is also of the view that machinery demand in the United States and Europe will remain weak, with downside to estimates in the United States likely. According to the firm, the ongoing farmland consolidation, a potential return to normal replacement and possible corn price appreciation on regional rotation may provide a more favorable demand outlook, although it is less likely that a recovery materialize in 2018.
Pressure Looming for Crop Chemistry
While noting that crop chemistry has weathered the down cycle relatively well, the firm said it sees additional pressures looming next year as growers look to continue cutting costs. Additionally, the firm also sees structural issues as chemistry volumes remain at risk due to new seed technologies ramping in the market.
Ratings And Price Target
- AGCO Corporation AGCO: Neutral from Underweight; price target upped to $53 from $39.
- American Vanguard Corp. AVD: Neutral from Underweight; price target upped to $17 from $12.
- CNH Industrial NV CNHI: Neutral from Underweight; price target upped to $8 from $5.
- Deere: Neutral from Underweight; price target upped to $100 from $70.
- FMC Corp FMC: Neutral from Underwfeight/price target upped to $51 from $45.
- Lindsay Corporation LNN: Neutral from Underweight; price target upped to $77 from $67.
At Time Of Writing ...
- AGCO was up 0.35 percent at $56.70.
- American Vanguard was gaining 2.27 percent to $18.05.
- CNH Industrial was down 0.23 percent to $8.54.
- Deere was down 0.55 percent at $103.37.
- FMC was edging down 0.07 percent to $55.07.
- Lindsay Corp. was soaring 4.30 percent to $85.06.
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