Deere outlook to improve in 18 months

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Deere & Co was upgraded by a Wells Fargo & Co analyst who said the industry’s demand cycle will reach a bottom in the next year to 18 months. Source: Bloomberg

That turnaround will mean improved sales volumes and margins in Deere’s fiscal 2017 and 2018, Andrew Casey said in a note, citing recent meetings with company executives.

Mr Casey raised his rating on the stock to outperform from market perform and boosted his valuation of the shares to US$100 to US$103 from US$85 to US$88.

Deere may already be seeing improved demand in Brazil, parts of Europe, Ukraine, Russia and India, Mr Casey said.

The company will also see better returns than competitors over the next 10 years due to reductions in structural costs, and its initiatives in agricultural technology.

“Demand appears to be flattening as dealer pricing drops” in the US and Canada, Casey wrote.

Such a recovery would bring much-needed relief to Deere, which has cut production amid a recession in the agricultural economy.

When the company reports earnings next month, it’s expected to post a third consecutive year of falling revenue and net income.

The main culprit for lower farmer spending is the glut of grain and soybeans, which has driven down crop prices. In such an environment, growers haven’t been as willing to purchase new Deere tractors, which can cost hundreds of thousands of dollars.

Instead, they have continued to rely on existing equipment, or turned to cheaper used tractors and combines. Deere rose 1.4% to US$87.49 in New York.

AGCO Corp which was also upgraded by Mr Casey to outperform from market perform, gained 3.6% to US$52.03.

Mr Casey hasn’t had outperform rating on Deere since 2012 or on AGCO since 2008, according to data compiled by Bloomberg.