Strong Fundamental Case Emerging for AGCO; Morgan Stanley Revised Target Price to $122

Morgan Stanley raised their stock price forecast on AGCO to $122 from $195, assigning an “Overweight” rating and said they see a strong fundamental case emerging for the agricultural equipment manufacturer as top-line acceleration is complemented by upside to margin estimates and an attractive valuation paradigm.

The industrial products company reported an EPS of $2.09 per share in the third quarter, way above the market consensus estimate of $0.97 per share. That was the third time AGCO had surpassed the Wall Street consensus estimates over the last four quarters.

“We expect AGCO’s revenue growth to accelerate in 2021 on the back of accelerating industry demand trends in both North America and Europe. Tangible progress towards AGCO’s 10% margin target is also underappreciated and not embedded in consensus numbers. We are raising our FY21/FY22 EPS estimates by 10-12% on the back of these dynamics. Our FY21/22 operating margin estimates are 60-70bps above consensus and our FY21/22 EPS stand 10% above consensus for both years. Further, AGCO screens favourably on a relative basis vs. both the market multiple and Ag Equipment peers,” noted Courtney Yakavonis, equity analyst at Morgan Stanley.

“As positive revisions begin to materialize in 2021, we expect the valuation gap to the market to close. Our $122 price target is based on 16.2x FY22 EPS, which represents a 20% discount to our equity strategy team’s target market multiple of 20.25x. AGCO also currently trades at a 20% discount to DE vs. its historical discount of 0%, but our price target still embeds similar discount vs. our Deere & Co. (DE) target multiple, presenting upside to our base case valuation if the gap to DE converges,” Yakavonis added.

Morgan Stanley gave a target price of $165 under a bull-case scenario and $54 under the worst-case scenario. Other equity analysts also recently updated their stock outlook. AGCO had its price objective boosted by Credit Suisse Group to $89 from $79. Credit Suisse Group currently has a neutral rating on the industrial products company’s stock. Barclays raised to an equal weight rating from an underweight and lifted their stock price forecast to $92 from $58.

In addition, BMO Capital Markets lifted their price objective to $110 from $90 and gave the company an outperform rating. Deutsche Bank raised their target price to $92 from $78 and gave the company a hold rating. At last, JP Morgan upped to an overweight rating from a neutral rating and set a $97 price objective.

Thirteen analysts forecast the average price in 12 months at $100.50 with a high forecast of $114.00 and a low forecast of $89.00. The average price target represents a 12.87% increase from the last price of $89.04. From those 13 analysts, nine rated “Buy”, four rated “Hold” and none rated “Sell”, according to Tipranks.

AGCO’s shares closed 0.70% lower at $89.04 on Monday. However, the stock is up over 15% so far this year.

“As a pure-play on ag equipment, AGCO has exposure to broad-based swings in grain prices, as well as the North American replacement cycle, though less so than peers. Ag Equipment remains our favourite Machinery end market for 2021, with double-digit end-market growth across both NA and EU Ag Equipment – AGCO remains the purest play on this theme,” Morgan Stanley’s Yakavonis added.

“We remain optimistic on share gains associated with recent efforts to standardize equipment across geographies, with the company’s IDEAL Combine roll out also likely to result in tangible share gains. We are increasingly seeing evidence of more sustained margin improvement and top-line outperformance vs. AGCO’s primary end markets,”

Deere Earnings Beat Wall Street Estimates; Forecasts Net Income Between $3.6-4.0 Billion for FY2021

Deere & Company, the world’s largest makers of farm equipment, reported better-than-expected earnings in the fourth quarter as demand for farm machines bounced on higher crop prices and government subsidy payments.

Agricultural, construction and forestry equipment manufacturer reported net income of $757 million for the fourth quarter ended November 1, 2020, or $2.39 per share, beating market expectations of $1.55 per share, up compared with net income of $722 million, or $2.27 per share, same period last year.

“The coronavirus pandemic was undoubtedly a headwind for Deere in fiscal 2020, but the company managed to post resilient operating margins in the fourth quarter, largely due to cost-cutting and solid pricing. We are raising our fair value estimate to $187 per share from $183 due to a more favourable near-term outlook than we previously modelled. In fiscal 2021, we expect Deere’s top-line to grow by roughly 10% compared with 2020,” said Brian Bernard, sector director at Morningstar.

“We expect Deere will benefit from increased investment from its dealer network over our forecast, resulting in 3% average sales growth from 2021-2025,” Bernard added.

For fiscal 2020, net income attributable to Deere & Company was $2.751 billion, or $8.69 per share, compared with $3.253 billion, or $10.15 per share, in 2019. Worldwide net sales and revenues decreased 2%, to $9.731 billion, for the fourth quarter of 2020 and declined 9%, to $35.540 billion, for the full year.

However, uncertainties regarding supply constraints as well as labour force availability due to the ongoing COVID-19 pandemic could negatively affect the company’s results and financial position in the future.

Deere’s shares closed 1.94% lower at $256.43 on Wednesday amid a weak broader market. However, the stock is down about 50% so far this year.

Net income attributable to Deere & Company for fiscal 2021 is forecast to be in a range of $3.6 billion to $4.0 billion. In the year ahead, Deere expects to benefit from improving conditions in the farm economy and stabilization in construction and forestry markets, according to John C. May. That forecast is higher than the Wall Street estimate of $3.3 billion.

Executive Comments

“Higher crop prices and improved fundamentals are leading to renewed optimism in the agricultural sector and improving demand for farm equipment. At the same time, we are looking forward to realizing the benefits of our smart industrial operating strategy, which is designed to accelerate the delivery of solutions that will drive improved profitability and sustainability in our customers’ operations,” said John C. May, chairman and chief executive officer.

Deere Stores Stock Price Forecast

Ten equity analysts forecast the average price in 12 months at $254.70 with a high forecast of $285.00 and a low forecast of $220.00. The average price target represents a -0.67% decrease from the last price of $256.43. From those ten analysts, four rated “Buy”, five rated “Hold” and one rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $335 with a high of $467 under a bull-case scenario and $134 under the worst-case scenario. The firm currently has an “Overweight” rating on agricultural equipment manufacturer’s stock.

Several other analysts have also upgraded their stock outlook. Deere & Company had its price objective raised by Robert W. Baird to $281 from $250. The brokerage currently has an outperform rating on the industrial products company’s stock. Deutsche Bank raised their price target to $244 from $227 and gave the stock a hold rating. BMO Capital Markets increased their price objective to $235 from $150 and gave the stock an outperform rating.

Analyst Comments

“Deere is one of the highest quality, most defensive names within the broader Machinery universe, given a historically lower cyclicality of Ag Equipment and history of strong management execution. FY21 should mark a tangible acceleration in the NA large ag replacement cycle, as commodity tailwinds are complemented by moderating trade headwinds and improving farmer sentiment,” said Courtney Yakavonis, equity analyst at Morgan Stanley.

“With mgmt continuing to execute against its 15% mid-cycle operating margin target, we see continued momentum in Deere’s margin improvement narrative – representing one of the most attractive idiosyncratic margin improvement narratives in the broader Machinery group,” Yakavonis added.

Upside and Downside Risks

Risks to Upside: 1) Recovery in commodity prices and US cash receipts. 2) Better than expected margin improvement efforts. 3) US infrastructure bills pass, driving outsized C&F growth – highlighted by Morgan Stanley.

Risks to Downside: 1) Commodity prices truncate ongoing replacement cycle. 2) Excess Used inventories limit pricing power and demand pull-through. 3) Mis-execution around 15% operating margin target. 4) Supply chain woes and price/material headwinds persist.

Check out FX Empire’s earnings calendar

Earnings to Watch Next Week: Autohome, Medtronic and Deere & Company in Focus

Earnings Calendar For The Week Of November 23

Monday (November 23)

IN THE SPOTLIGHT: AUTOHOME

Autohome, a leading online destination for automobile consumers in China, is expected to report a profit of $6.31 in the third quarter with possible revenue growth of over 6% as demand for cars recovered in the world’s second-biggest economy.

The company has reported a higher-than expected-earnings in most of the last four quarters. Autohome Inc is expected to show an increase in its third-quarter earnings to 96 cents​ per share according to the mean Refinitiv estimate from seven analysts. Wall Street expects results to range from 89 cents to ​$1.02 per share, Reuters reported.

“We forecast ATHM’s revenue to grow 6% YoY to 2.3 billion yuan in 3Q20, and beat the higher end of its 3Q20 revenue guidance of 2,240 million to 2,280 million yuan, within which we forecast: (1) its media service revenue to remain flattish YoY; (2) its lead generation revenue to grow 1% YoY; and (3) its online marketplace revenue to increase 30% YoY supported by strong data product revenue growth (i.e. we expect ATHM’s data product revenue to increase 50% YoY in 3Q20). In addition, we expect ATHM’s 3Q20 non-GAAP net margin to improve ~5ppts YoY to 37% thanks to its effective cost control and better return of 818 Global Auto Show event this year vs. last year,” said Eddy Wang, equity analyst at Morgan Stanley.

“China’s auto market has witnessed a consistent recovery in 3Q20: New car sales have seen a decent recovery with new car sales growth improving to 8% YoY in 3Q20, sustaining its recovery trend since 2Q20. We note that new car sales growth continued to increase over 9% YoY in October, which bodes well for auto sales recovery to continue in 4Q20, the traditional peak season for auto sales in China,” Wang added.

Autohome’s shares closed 1.98% higher at $101.83 on Friday; the stock is up over 1% so far this year.

TAKE A LOOK AT OUR EARNINGS CALENDAR FOR THE FULL RELEASES FOR THE NOVEMBER 23

Ticker Company EPS Forecast
KFY Korn Ferry International $0.05
PLAN Progressive Planet -$0.10
BZUN Buzzi Unicem RSP $1.17
MNTA Momenta Pharmaceuticals -$0.46
CBT Cabot $0.52
DQ Daqo New Energy $0.60
CENTA Central Garden Pet -$0.04
ARWR Arrowhead Research -$0.12
A Agilent $0.94
AMBA Ambarella $0.05
URBN Urban Outfitters $0.44
TCOM Trip.com Group Ltd $1.02
IMMU Immunomedics -$0.29
VIST Vista Oil Gas -$0.19
GPFOY Financiero Inbursa ADR $0.09
MSNFY Minera Frisco ADR $0.05
GCTAY Siemens Gamesa ADR $0.01
AEG Aegon $0.27
TLK Telekomunikasi Indns Tbk Prshn Pp Pt $0.40
WF Woori Bank $1.57

Tuesday (November 24)

IN THE SPOTLIGHT: MEDTRONIC

Medtronic, an American Irish-domiciled medical device company, is expected to report a $0.80 profit in the second quarter of the fiscal year 2021 after reporting $0.62 earnings per share in the second quarter of the fiscal year, topping the market estimate of $0.21 by $0.41.

Sell-side analysts forecast that Medtronic plc will post 3.93 earnings per share for the current year, according to American Banking and Market News.

“Peer C3Q results across cardiovascular, neuromod, surgical, and diabetes suggest up to ~5 points of F2Q upside. The Risk/ Reward for Medtronic is positive but resurgence concerns have muted the near-term upside case for “Phase 2” Large-Caps despite vaccine data,” said David R. Lewis, equity analyst at Morgan Stanley.

“Our Medtronic model currently sits at $7,125 million in total F2Q21 revenues (reflecting -8.4% organic declines) and $0.78 in EPS, roughly in-line with consensus at ~$7,064mn in revenues and $0.80 in EPS. We model ~$90 million in COVID-19 driven, incremental ventilator sales this quarter (following $150 million in both F4Q and F1Q), as demand in certain regions has likely waned but Emerging Markets remained as of F1Q EPS,” R. Lewis added.

Medtronic’s shares closed 0.75% lower at $110.16 on Friday. However, the stock is down about 3% so far this year.

TAKE A LOOK AT OUR EARNINGS CALENDAR FOR THE FULL RELEASES FOR THE NOVEMBER 24

Ticker Company EPS Forecast
CPG Compass Group -£6.52
PNN Pennon Group £29.94
SHB Shaftesbury -£1.70
WB Weibo $0.60
EV Eaton Vance $0.87
NJR New Jersey Resources $0.57
DLTR Dollar Tree $1.15
SJM J.M. Smucker $2.22
BBY Best Buy $1.64
ADI Analog Devices $1.33
HRL Hormel Foods $0.44
DKS Dick’s Sporting Goods $0.98
J Jacobs Engineering Group Inc $1.32
BURL Burlington Stores $0.16
DY Dycom Industries $1.02
CPB Campbell Soup $0.91
PDCO Patterson Companies $0.38
JWN Nordstrom -$0.05
GPS Gap $0.31
ADSK Autodesk $0.95
HPQ HP $0.52
VNET 21Vianet -$0.19
VMW VMware $1.44
AEO American Eagle Outfitters $0.32
CBPO China Biologic $1.34
JRONY Jeronimo Martins $0.45
HOCPY Hoya Corp $0.74

Wednesday (November 25)

IN THE SPOTLIGHT: DEERE & COMPANY

Deere & Company, the world’s largest makers of farm equipment, is performing excellently so far this year. Shares of the Agricultural, construction and forestry equipment manufacturer are up about 50% so far this year. The company’s earnings report next week will provide investors with an insight into 2021, where it is also expected a profit of $1.31 in the fourth quarter.

In the previous quarter, Deere & Company reported $2.57 earnings per share, topping the consensus estimate of $1.26 by $1.31. The company had revenue of $7.86 billion for the quarter, compared to the consensus estimate of $6.70 billion. However, the company’s revenue plunged 12.4% compared to the same quarter last year. Analysts expect that Deere & Company will post 7.61 EPS for the current fiscal year, according to Zolmax.

“The Zacks Consensus Estimate for Deere’s earnings per share is pegged at $1.35 for the fiscal fourth quarter, suggesting a 36.9% year-over-year plunge. The Zacks Consensus Estimate for total revenues is pinned at $7.23 billion for the period, indicating a year-over-year decline of 16.9%. The company has a trailing four-quarter average earnings surprise of 36.18%,” noted analysts at Zacks Research.

Deere & Company’s shares closed 1.16% higher at $258.56 on Friday

TAKE A LOOK AT OUR EARNINGS CALENDAR FOR THE FULL RELEASES FOR THE NOVEMBER 25

Ticker Company EPS Forecast
UU United Utilities £29.36
SMTC Semtech $0.46
PVH PVH $0.17
AUOTY AU Optronics $0.09
TRNO Terreno Realty $0.36

Thursday (November 26)

Ticker Company EPS Forecast
BVIC Britvic £19.24
ASEKY Aisin Seiki Co $0.42
SVT Severn Trent £68.16
GEBHY Genting Berhad -$0.07
RLAY Relay Therapeutics Inc. -$0.32

Friday (November 27)

No major earnings scheduled for release.

Deere’s Shares Hit All-Time High on Strong Earnings Forecast; Buy with Target Price $235

Deere & Company, the world’s largest makers of farm equipment, forecasts net income to be about $2.25 billion for the full year after the company reported net income of $811 million, or $2.57 per share for the third quarter, sending its shares up over 6% to a record high of $202.81.

However, many uncertainties remain regarding the effects of the global COVID-19 pandemic that could negatively affect the company’s results and financial position in the future.

Agricultural, construction and forestry equipment manufacturer said for the first nine months of the year, net income attributable to Deere & Company was $1.993 billion, or $6.30 per share, compared with $2.532 billion, or $7.87 per share, for the same period last year. Quarterly profit came in at $2.57 per share and equipment sales fell 12.4% on a year-on-year basis.

Deere said its worldwide net sales and revenues decreased 11%, to $8.9 billion, for the third quarter of 2020 and declined 12%, to $25.8 billion, for nine months. Net sales of the equipment operations were $7.9 billion for the quarter and $22.6 billion for nine months, compared with $8.9 billion and $26.2 billion last year.

“We believe DE’s 3Q is beginning to show the potential around the margin improvement program, aimed at driving 15% mid-cycle segment margins. We raise our numbers for FY21-23 but still only get to 13.8% segment margin by FY23. Achieving the 15% target by FY22 would add nearly $2.00 to our above-consensus estimate. A more robust replacement cycle could provide further upside,” said Stephen Volkmann, equity analyst at Jefferies.

Deere’s shares closed 4.39% higher at $199.50 on Friday. However, the stock gained 43% since late May and up over 15% so far this year.

Deere stock forecast

Fourteen analysts forecast the average price in 12 months at $189.38 with a high forecast of $235.00 and a low forecast of $154.00. The average price target represents a -5.07% decrease from the last price of $199.50. From those 14 analysts, nine rated “Buy”, four rated “Hold” and one rated “Sell”, according to Tipranks.

Morgan Stanley target price is $181 with a high of $281 under a bull scenario and $63 under the worst-case scenario. Jefferies raised the price target to $230 from $200.

Other equity analysts also recently updated their stock outlook. Deere & Company had its price target increased by Goldman Sachs Group to $209 from $182. Deutsche Bank cut from a buy rating to a hold rating and set a $185.00 price objective for the company. BMO Capital Markets boosted their price target on Deere & Company from $150.00 to $235.00 and gave the stock an outperform rating in a report on Monday.

We think it is good to buy at the current level and target $235 as 50-day Moving Average and 100-200-day MACD Oscillator signals a strong buying opportunity.

Analyst view

“DE is one of the highest quality, most defensive names within the broader Machinery universe, given an historically lower cyclicality of Ag Equipment and history of strong management execution. We like the ongoing Ag replacement cycle long term, although FY20 is likely to represent a pause in the Ag replacement cycle as US/China trade tensions, ASF and poor US planting all weigh on sentiment,” said Courtney Yakavonis, equity analyst at Morgan Stanley.

“With incremental commentary around cost normalization and benefits from voluntary separation/potential international footprint reductions, we see a combination of more supportive margins and relative defensiveness of Ag markets (in an increasingly choppy macro backdrop) driving a favourable risk-reward for FY20,” he added.

Upside and Downside risks

Upside: 1) Recovery in commodity prices and US cash receipts. 2) Better than expected Wirtgen top-line synergies. 3) U.S. infrastructure bills pass, driving outsized C&F growth – highlighted by Morgan Stanley.

Downside: 1) Commodity prices truncate ongoing replacement cycle. 2) Excess Used inventories limit pricing power and demand pull-through. 3) Mis-execution around Wirtgen synergies and $500b cost-cutting plan. 4) Supply chain woes and price/material headwinds persist.