Report: UBS Upgrades Deere Stock; Precision Agriculture A Key Differentiator

In a recent report on Deere & Co., UBS has upgraded the company’s stock from Sell to Neutral with a 12-month price target of $81, reports Zeeshan Athar on BusinessFinanceNews.com. The main focus of UBS’ research in the report, is the U.S. corn business. The research house expects corn prices to rise over the next six months. This rise will support Deere stock. While UBS expects slight increase in 2016 corn acreage, it believes there is downside risk to yields which would cut materially into ending inventories.

UBS expects corn acreage to increase slightly to 89.3m acres in 2016 from 88.4 in 2015. The decline in soybean prices in 2015, led by good U.S. and South American production, along with weaker demand from China, is likely to drive the shift back to corn acreage. UBS does not expect any material change in corn demand, although it foresees some downside risk to exports due to stronger U.S. dollar.

USDA’s National Agricultural Statistics Service released crops data shows precipitous decline in corn plantation in 2015 as compared to 2012. Year over year (YoY) comparison shows 2% decline in 2015 to 88.38 million acres from 90.59 million acres in 2014. Harvesting fell by 3% over the same period on the back of low corn prices. In these five years, prices dropped by 38% per year on average; from $6.02 per bushel in 2011 to $3.71 per bushel in 2015. However, it is likely that these prices will revert in 2016 amid lower corn inventories during the year. This would drive farmers to harvest more corn.

Credit Suisse Analysis

While UBS ponders over the impact of corn on Deere & Co., Credit Suisse is focused on mergers and acquisitions in agriculture sector. Deere’s strong balance sheet puts the company in position to acquire such businesses. Based on this view, Credit Suisse maintains an Outperform rating on Deere stock with a 12-month price target of $87.

Deere’s agriculture business is split into 40% large agriculture, 40% small agriculture, and 20% Turf. Recently, Deere provided its company update where it foresees no change in the company’s long-term growth trend. However, it expects the U.S. economy to recover slowly despite increases in commodity prices.

The company points out that Latin American farmers are earning well, yet their lack of confidence remains an issue. Argentina is the most profitable region while the European region is viewed as a laggard. Currently, Deere holds excess construction inventory, however it expects to sell this off within the first half of 2016. The company has announced 10,000 job cuts from its global workforce of 67,000 people. On the other hand, the company does not foresee the need to close any major plant based on its long-term market view. In its 2016 guidance, Deere & Co. projects EPS at $9.09 along with $32 billion in sales.

In line with Credit Suisse’ expectations, the company continues to invest in precision agriculture; both organically as well as through acquisitions. This differentiates the company’s competitive positioning from others. Precision agriculture is predicted to be a $20 billion market. Strategic acquisitions in this segment might lead to Deere’s stand-alone business.

Deere acquired Monosem and Precision Planting in November 2015. With Monosem, Deere is likely to use its global platform in other countries. On the other hand, Precision Planting comprises the largest installed base of precision planting through its network of retro-fit planters. Deere expects to monetize through seed companies, agriculture service providers and chemical companies to augment its revenue stream with Precision Planting.

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