In a report call “AGpocalypse Now?,” Morgan Stanley’s Nicole DeBlase and team worry that Deere (DE) could be setting up for a repeat of 1998-1999. They explain:
Bloomberg News Excluding the financial crisis-driven 2008-09 trough, the last Ag equipment downturn took place in 1998-99 – and examining industry fundamentals during this time reveals many parallels with the current setup. Commodity prices benefited from drought in 1996, but then yields were far better than expected during 1997-98, causing the corn price to fall below $2/bu. As such, the USDA projected a 5% Y/Y decline in farm cash receipts in 1998, followed by two subsequent years of LSD declines – the exact setup outlined by the agency for the 2014-16e period…
Applying Deere's FY99 guidance yields a 16% Y/Y Agriculture & Turf revenue decline in FY15e…At the margin line, after accounting for structural improvement ($100m restructuring, SVA) and mix, we credit Deere with 330bps of peak-to-peak margin expansion. Similarly, if we apply 50% decrementals to an implied 30% Y/Y decline in HHP sales, we see trough A&T margins of 6.0%, well below 12.1% [Morgan Stanley estimate]. This would drive bear case EPS of $5.00. We apply a 15-16x trough multiple, for a $75-80 bear case valuation. This leaves 11% remaining downside vs. the current share price, and so we remain comfortable with our UW rating.
Shares of Deere have dropped 1% to $86.30 at 3:54 p.m. today, and are down 5.5% so far this year.
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