Following its upgrade of Deere & Company (NYSE: DE) in December 2016, Bank of America Merrill Lynch also upgraded two more agricultural names, namely CNH Industrial NV (NYSE: CNHI) and AGCO Corporation (NYSE: AGCO).
Credit Upgrade Of CNH Seminal Moment
Analysts Ross Gilardi, Michael Feniger and Natalle O'Dea believes last week's credit upgrade of CNH to investment grade to be a seminal moment for the agricultural equipment space. Over the next 12 months, the analysts expect the agricultural equipment margins to surprise to the upside across the space, citing the improvement in the used equipment market, stabilizing demand patterns in North America and renewed growth in Brazil.
Bank of America positive view on the agricultural sector is due to:
- The current downturn in the U.S. corn belt being much less worse than in the 1980s.
- Farmland values, though rolled over somewhat, being more resilient this cycle.
- Grain oversupply not that pronounced this year, relative to the mid-1980s, and has been showing signs of stability.
"The grain markets remain very challenging, but we have more conviction that an equipment recovery is sustainable after our inaugural deeper-dive primer on the equipment space," Bank of America said.
Precision Agricultural Methods To Spur Innovation
The firm also believes advancement in data storage, via cloud computing and increased used of telematics has facilitated rising precision agricultural methods, providing an impetus for innovation by farm equipment OEMs. Therefore, the firm expects the industry to experience 2-percent annual pricing gains notwithstanding the farming downturn.
OEMs Way Below Mid-Cycle
Bank of America is of the view that the market for OEMs are still way below the mid-cycle, suggesting mid-cycle demand for the space is at least two-three years away. "We likely finish 2017 about 35 percent below prior peaks for the Brazilian market too, where credit subsidies were recently raised despite renewed political turmoil," the firm added.
Upgrading CNH And AGCO
The firm upgraded shares of CNH Industrial to Buy from Neutral, following 25–30 percent upgrades to its earnings per share estimates. The revised estimate was about 12 percent ahead of the consensus in 2017, the firm clarified. The firm also thinks there is 15 percent upside to the stock price.
Meanwhile, the firm upgraded shares of AGCO to Neutral, with 4–13 percent upgrades in earnings per share estimates through 2019. The firm noted that the company has done a good job with its cost structure. Nevertheless, the firm is a little less bullish on AGCO, for want of better margins in South America.
"Potential for incremental margins to lag Deere and CNH due to limited exposure to NA and a bigger position in the grain storage market, which accounts for about 20–25 percent of operating earnings," the firm believes.
- CNH shares were upgraded to Buy from Neutral, with the price target lifted to $15 from $10.50.
- AGCO shares were upgraded to Neutral from Buy, while the price target was raised to $70 from $58.
Will Ag Stocks Flourish Now That California's 5-Year Drought Is Officially Over?
Down On The Farm: Looking At The Agribusiness ETF
Latest Ratings for AGCO
|Jun 2017||Bank of America||Upgrades||Underperform||Neutral|
|May 2017||JP Morgan||Upgrades||Underweight||Neutral|
|Apr 2017||Stifel Nicolaus||Initiates Coverage On||Hold|
View More Analyst Ratings for AGCO
View the Latest Analyst Ratings
See more from Benzinga
- Thomson Reuters Is A Buy; Look For Good News On The Topline This Year
- The Sell-Side Response To Amazon–Whole Foods Deal
- Digesting Meal-Kit Service Offerings Ahead Of Blue Apron's IPO
© 2017 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.