UBS Downgrades Deere, Expects Near-Term Weakness In Farming Equipment Demand

Shares of Deere & Company DE have sharply rebounded from May's weakness and the recovery now reflects the company's outlook, according to UBS.

The Analyst

UBS analyst Steven Fisher downgraded Deere from Buy to Neutral with a price target lifted from $158 to $167.

The Thesis

UBS's proprietary agricultural dealer survey points to a weakening in farming equipment over the next one to two quarters from poor growing conditions and trade concerns, Fisher wrote in the note. Demand will likely remain "restrained" for the near term and 2020 should see a "pick up" in activity.

Specifically, Deere's agricultural business could see a growth rate of 9% to 10% in 2020, which is a "more positive" outlook compared to prior findings. Beyond the current year and into next year, the company sees no change to its long-term replacement demand story

Deere's stock is trading near $163 per share, which implies a P/E of 14 times on EPS estimates of around $11.50 to $12 per share. This is a "reasonable base case" for 2020 and the bull case for shares to trade up to $195 per share would require double-digit growth in agriculture and a low-single digit growth in construction sales.

Price Action

Shares of Deere were trading lower by 1% at $161.98 in Wednesday's pre-market session.

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