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Economy, Stocks  | July 16, 2019

Bank of America analyst Ross Gilardi acknowledges slower economic growth is a concern, but he doesn’t see a global recession on the horizon. And that is relatively good news for Deere stock.

The analyst upgraded shares of Deere to Buy from Neutral on Monday. The broker’s new price target is $185 a share, 11% higher than recent levels.

Gilardi’s ratings action continues a string of conflicting messages from Wall Street regarding shares of the iconic American pioneer of the steel plow.

Last week, Deere stock (ticker: DE) was downgraded at UBS because of weakening near-term demand. And before that, Baird analyst Mig Dobre upgraded Deere shares to Outperform in June. For his part, Dobre believes higher corn prices will lead to better farm earnings in the future. That will give farmers the cash needed to purchase new machines. Corn prices, for reference, are up 19% year to date because wet weather in the Midwest limited acreage and delayed planting.

The back story. Farm income matters—a lot—for Deere sales. Farmers have deferred equipment purchases for years because of low crop prices. Deere agricultural sales remain about 20% below their 2013 peak.

Still, the stock has performed well. Deere shares have returned about 16% a year on average for the past 5 years, better than the 10% average annual return of machinery stocks in the S&P 500.

What’s new. Gilardi focused not only on the agricultural industry when upgrading shares, but on the global macroeconomic backdrop as well.

“The global [purchasing managers index, or PMI] is 49.4, central banks around the world have a loosening bias, and President Trump is running for re-election in 2020,” writes Gilardi, adding that the combination of loose monetary policy and an election cycle aren’t “typically an optimal time to be indiscriminately selling cyclical [stocks].” (The PMI is a read on industrial activity. A level above 50 indicates that manufacturing is growing.)

Gilardi thinks investors shouldn’t fight the Federal Reserve, which is widely expected to lower interest rates at its next monetary policy meeting later this month.

Looking ahead. No recession would be good news for all machinery stocks—not just Deere. Caterpillar (CAT) stock, for instance, trades for just 11 times estimated next year’s earnings, a 20% discount to other machinery stocks in the S&P 500. Deere, meanwhile, trades at 14 times estimated next year’s earnings, in line with other machinery companies.

Caterpillar shares trade at a discount because investors are worried about China’s economic growth. The recent 6.2% Chinese quarterly growth figure was its slowest growth in many years, but investors are still hopeful a U.S.-Chinese trade deal will relieve some economic pressure on the world’s second-largest economy.

Deere shares were up 0.6% in Monday morning trading. The Dow Jones Industrial Average was flat. Caterpillar shares advanced 1%.

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