Telematics a Rare Bright Spot at Ag Show
Despite a tough near-term outlook, we see value in Deere and CNH.
We recently attended the Farm Progress Show in Boone, Iowa. The annual show is one of the major events in the North American agricultural industry, where farmers and agricultural equipment manufacturers come together to assess the latest product offerings. Following the show, we view wide-moat Deere (DE) and no-moat CNH Industrial (CNHI) as undervalued and reiterate our $97 and $9 fair value estimates for the respective shares. Although the agricultural sector remains tough, we believe both stocks offer an attractive margin of safety relative to a difficult near-term outlook.
Reflecting recent weakness in crop prices, overall sentiment seemed dire among buyers; however, there did appear to be some divergence in buyer appetites based on location. According to anecdotes from farmers and management teams, North American agricultural demand remains depressed. While there is some optimism that there will have to be a refresh cycle to replace worn-out combines, there were few near-term indications that demand is improving. Europe, which had been expected to grow in 2016, now appears on track for modest sales declines as French and German farm income is below expectations and uncertainty surrounding Brexit (farm income transfer payments are the European Commission’s biggest expense) has probably damped the appetite to proactively buy equipment. On the basis of recent sales trends as well as orders, there is some optimism that South America could resume sales growth in 2017. Due to a combination of strong farm income, easy prior-year sales comparisons, and a potential resolution in Brazil’s political turmoil, farmers may look to upgrade and expand equipment fleets again in the region--a positive development for AGCO (AGCO), which is the largest player in the market.
Kwame Webb does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.