Tuesday, September 05, 2006

Calls of Note Part 9

- UBS is out with several Farm Equipment upgrades as they are moving from an investment thesis based on the potential for a large corn crop in 2006 to cause a downdraft in farm commodity prices, to a thesis based on belief that demand for corn in 2007 may be too strong for production to keep up. Firm believes a shortage of corn could develop next year, leading to higher corn prices and higher farm equipment company stock prices.

Firm is raising their target prices on AG to $26 per share, CNH to $25 per share and DE to $96 per share to reflect a valuation based on initial forecasts of earnings in 2008. They are raising ratings on AG and CNH to Neutral, from Reduce. Raising rating on DE to Buy, from Neutral.

Firm remains with significantly below consensus earnings forecasts for the farm equipment manufacturers, driven by relatively weak farm equipment demand (current depressed levels of farm commodity prices, coupled with elevated input costs and higher interest rates) and relatively weak construction equipment demand (housing/rental).

Notablecalls: Talking to a technically oriented trader this AM saying he will most likely be fading the upgrade. Thinks DE is the best candidate. Most of these stocks have been going vertical lately and I suspect the catalyst was the largest outdoor agriculture show called the Farm Progress Show in Amana, Iowa that took place last week. Bear Stearns notes that overall the mood at the show was more upbeat than they have seen for a couple of years as farm conditions are improving with strong livestock markets, growing exports and ethanol usage. All participants agreed that farmers are "cautiously optimistic " -- which is a change from last year when drought caused farmers to be "cautious ". The reason for the slightly more optimistic outlook is simply that demand for U.S. food commodities is growing and production is not keeping up.

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