Why J.P. Morgan Isn't In Love With Ag Stocks Deere Or CNH Industrial

November 15, 2015

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CNH Industrial NV (NYSE: CNHI) Shares are down 16 percent year-to-date, while shares of Deere & Company (NYSE: DE) have declined 15 percent over the same period.
JP Morgan’s Ann Duignan downgraded the rating on CNH Industrial from Neutral to Underweight, while maintaining an Underweight rating on Deere.
Weakening agriculture equipment industry fundamentals are expected to restrict the performance of various players in the segment, Dulgnan stated.

The agriculture equipment industry continues to be plagued by excess inventory, analyst Ann Dulgnan mentioned. This, coupled with sluggish demand and weakening fundamentals in global agriculture, are expected to restrict the performance of players in the segment.

A strong-dollar-weak-real combination is also expected to weigh on the soft commodity fundamentals in 2016 and 2017, Dulgnan said.

CNHI: Upside Risk From Potential M&A Subsided

The price target for CNH Industrial has been reduced from $6.50 to $5.00. Analyst Ann Dulgnan believes that CNH Industrial will find it difficult to achieve its full-year margin guidance in the current environment, without burdening the supply chain with new inventory.

CNH Industrial can achieve improved margins in 4Q only through improved cost absorption through increased production volumes. This would raise the risk of ending the year with higher-than-required channel inventories, the analyst pointed out.

Dulgnan believes that the upside risk from potential M&A has subsided, thus removing a supporting factor for CNH Industrial.

Deere: Facing Similar Challenges

The price target has been reduced from $82 to $64. Since Deere holds the highest share of the NA row crop equipment market, any action by its competitors to over-produce will increase channel inventories. This will exert additional downward pressure on new and used prices as well as residual values, thus prolonging the likely duration of a downturn, Dulgnan commented.