A Deere in the Headlights: Why We're Cutting Our Price Target
Reports from CAT and AGCO give us insight into construction and farm equipment outlooks.
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* We're cutting our price target for Deere & Co shares by $50.
* Need for farm equipment remains solid, but more normalized demand and the expected return of dealer incentives may slow agriculture equipment margin improvement prospects.
*Caterpillar's guidance suggests slower new construction equipment demand, but infrastructure spending should continue to drive favorable fleet use levels United Rentals.
We are reducing Deere & Co.'s DE price target to $450 from $500 at Deere, as we look at the results of competitors' earnings reports.
The outlook for farm equipment, especially high horsepower equipment, remains solid, but we also see subdued margin improvement ahead and softer new construction equipment demand, as we dig into Deere competitor Caterpillar's CATquarterly report and earnings call. We also see the demand-supply dynamic for overall ag equipment is returning to normal levels, after reading between the lines of the report for AGCO Corp. AGCO , another Deere competitor.
For now, we're keeping our "One" rating for DE shares.
On Caterpillar's earnings call, management said this morning that guided current quarter revenue was "slightly higher" compared to fourth-quarter 2022. But that was less than the market consensus, which expected growth of at least 5%. That squishy guidance suggests higher volumes compared to the September-ending quarter, just not as much as Wall Street was looking for. CAT shares are down more than 5% as we write this alert, which makes CAT shares the latest example of how investors run from less-than-pristine earnings and guidance.
CAT shares are catching investor attention, helping pull down our shares of Deere.
Thanks to its construction equipment business, AGCO Corp. AGCO , however, reported a quarterly top- and bottom-line beat. Higher equipment volumes and pricing increases in recent quarters led AGCO to up its full-year 2023 outlook ahead of consensus expectations. That's giving some lift today in AGCO shares and so is the earnings call comment that its order board remained higher than their historical averages.
But AGCO said it expects to see limits to the benefit of new pricing and the return of dealer incentives this quarter. This suggests that after several quarters of limited supply, the demand-supply dynamic for overall ag equipment is normalizing. With borrowing costs expected to be higher for longer, something we expect the Fed to reiterate tomorrow afternoon, this likely means a more competitive ag equipment market in 2024, which may restrict year-over-year margin improvement prospects at Deere in the first half of 2024. We'll look for corroboration from CNH Industrial CNHI when it reports on Nov. 7.
Higher borrowing costs appear to now be hitting new construction equipment demand. But the need for construction equipment will remain. We see that fostering favorable fleet use rates at our "One"-rated United Rentals URI holding. Tomorrow brings the September Construction Spending report, and the non-residential spending data should be positive for our shares of United Rentals and Vulcan Materials VMC .
AAP is long DE, VMC, URI.