The brokerage downgraded the tractor supplier to a neutral rating from Wednesday's bid, two days before the company's first quarter earnings and sales report. Analyst Ross Gilardi wrote in a note to clients that the decision to reduce Deere's rating was based on the apparent lack of progress between Washington and Beijing and on the declining demand for construction equipment.
These two factors combined make it unlikely that Deere will increase its outlook for the 2019 fiscal year and maintain its current premium at rival Caterpillar machine builder, Gilardi said to its customers. The analyst also lowered its target price of Deere shares over 12 months to $ 170 and reduced to $ 11.25 the estimate of its earnings per share for the 2019 fiscal year.
"Judging by Deere's spectacular outperformance, investors seem satisfied with China's lifting of soybean retention rates in the US," Gilardi said. "If tariffs are not lifted and China eliminates soybean imports from the United States, US farmers will face growing uncertainty about spring planting because US soybean stocks are already in We believe this represents a real risk for the demand for agricultural equipment in the second half of 2019. "
As one of the largest agricultural machinery manufacturers in the world, Deere could suffer the consequences if trade negotiations between the US and China do not improve. Soybean shipments landed in China in the first two weeks of 2019 have dropped about 37% from the first two weeks of 2018, according to the ClipperData tanker traceability company. Soybeans account for 40 percent of the area harvested for the US farmer, according to Bank of America.
The world's largest soybean consumer in the world, China, has become a hub for Brazil and other exporters since the country lowered its soybean tariffs.
Beijing imposed levies of between 5 and 10% on US products worth $ 60 billion as of September 24, in response to the 10% tariff imposed by the Trump administration on Chinese products to 200 billion dollars. If the two economic powers do not reach an agreement by March 2, these US taxes will increase to 25%.
"It is remarkable to us that Caterpillar is considered by many to be the hero of the US-China trade war, while Deere is considered by many to be much less vulnerable," added Gilardi. "In fact, Deere is also involved in the US-China trade war that any company we follow because of the retaliatory tariffs imposed by China on American soybeans."
The soy stocks to use climbed to 22.2%, "significantly above" relative to long-term averages, the analyst wrote. The historical glut has not so far had a negative impact on the demand for equipment as US farmers were able to monetize a significant portion of last year's crop at a reasonable price and were compensated by the federal government.
However, if the trade dispute is not resolved by the beginning of the planting season, agrarians could shift to growing maize more and more, creating a new glut of commodities.
"Soybean tariffs must disappear," wrote the analyst.