Monday, November 23, 2009

Deere (NYSE:DE): Upgraded to Overweight at Morgan Stanley

Morgan Stanley is upgrading Deere (NYSE:DE) to Overweight from Equal-Weight with a $64 price target (prev. $48)

According to the firm demand for US farm equipment is growing as customers add acreage, a secular phenomenon that is widely underestimated. Cyclical factors are also more favorable than most believe, with corn likely higher into 2010 and the potential for recovery in Brazil. They see this as a rare opportunity where consensus is too conservative on both cyclical and secular factors, making DE risk reward highly favorable vs other machinery stocks.

Morgan Stanley's take on three core debates: 1) US farm equip sales rate is close to mid cycle, not above trend. Their proprietary analysis strongly suggests that the entire market for new equipment is a small group (~25,000) of very large farmers. These farmers doubled acreage over 10 years, taking 30mn acres from smaller farmers who don’t buy new equip. Those acres equate to 6,000 add’l annual tractors needed, vs 10 yr avg of 23,000 units.

2) Corn prices should strengthen into 2010. Demand should swing to up 4% from flat, on feed and ethanol. Lower demand from lower US livestock has already happened to a large extent.

MS commodity strategist Hussein Allidina argues for $4.50 corn in the ’09-’10 marketing year, on rising demand for US corn. Feed demand in the US will be soft again in 2010, but much of that downturn has already happened. EM demand for feed is still up.

3) Brazil has potential to offset a US drop if it occurs. A retracement of half the recent high hp market plunge in Brazil, plus 5 points of share, would offset a 10% US tractor fall. Deere gained 9 share pts. in ’09.

Brazilian offset could be bigger than realized. Brazil high horsepower volumes are down 50% in 2009, Deere has taken 900 bps of share on low volumes in Brazil. A rebound in Brazil that half retraced the fall, along with 5 pts of share, would offset a 10% US tractor drop.

Underpriced option in construction for ‘11/’12: Four years of volume declines, and two years of near zero volumes (’09 and ‘10e) will strain competitors’ dealers. Add in Tier 4 emissions turmoil and Deere (CAT too) should gain share as smaller competitors struggle.

Notablecalls: The Deere call reads pretty strong (and out-of-consensus). The stock is ready to break out and I think it will trade above the current 52-week high today. I'm guessing $53 level may break today with $53.50 not out of the question.

The Fertilizer stocks have been red-hot of late and Deere can be considered a sympathy play of a sort.

Something is going on in the Ag. space as big buyers have been lurking around for weeks now.

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