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Shares of Deere and other leading farm machinery stocks are sharply lower Monday after a downbeat note from Piper Jaffray said the current agricultural downtown is likely will persist into 2017.
"We expect that the current ag downturn, which has prolonged for the last three years, will continue into next year, weighing on farmer income and resulting in further declines in farm machinery demand," said Piper Jaffray analyst Brett Wong in a research note.
Shares of Deere ended the day down $2.20 a share, or 2.75 percent, to $77.92. AGCO was down $1.29 a share, or 2.66 percent, to $47.26. U.S.-listed shares of CNH Industrial were down 20 cents, or 2.98 percent, to $6.52.
Piper downgraded shares of Deere, AGCO and CNH to an "underweight" investment rating from "neutral," saying the farm machinery maker stocks have been trading "at elevated multiples, expecting that this year will be trough demand with a recovery next year."
"We believe that overall global farm machinery demand will be down next year, which does not support current expectations for the stocks, and that estimates and valuation multiples are at risk," Wong said.
Piper's note contrasts sharply with a more upbeat ag outlook issued June 2 by Goldman Sachs, which at the time upgraded Deere to a "buy" from "neutral." In that note, Goldman said it saw "cyclical upside for ag equipment off 30+ year lows" and the firm put a 12-month target on Deere stock of $105.
In its note, Piper said its 12-month target price for Deere stock is $67. Piper's AGCO target is $37 and CNH is $5.
Citi issued a note midday Monday that its field checks with North American farm equipment sellers found "subdued outlooks following the recent reversal in grain prices." Also, it said the firm at this stage is "increasing downside risks" for current full-year estimates and lowering them for the major sector players. It also sees "the best risk-adjusted upside in buy-rated Deere, followed by AGCO, with CNHI our least preferred ag name."
Generally favorable growing and weather conditions in the Corn Belt are expected to "put additional pressure on corn prices into the low $3/bushel range — a price below current break-even for farmers who went," according to Piper.
Through last Friday's close, Deere and AGCO shares were both up 5 percent or more and nearly matching the broader market's performance.
New farm equipment sales also are getting impacted by high inventory levels in the used market.
"Used equipment inventory continues to be elevated, although we believe inventories are moving lower, but it will likely take multiple years to normalize," said Wong.
AGCO and Deere are scheduled to report earnings next month.
Analysts polled by Thomson Reuters forecast Deere will report an earnings per share decline of 38 percent in the fiscal third quarter ending in July and revenue down 11 percent. For the full year, Deere is forecast by analysts to show a 33 percent drop in EPS and revenues are seen declining 8 percent.
As for AGCO — known for its Challenger and Massey Ferguson brands — analysts are looking for EPS in the company's second quarter to slide 26 percent and revenue to fall 9 percent. For the full year, AGCO's EPS is forecast to drop 28 percent and revenue is projected to slip 7 percent.
The majority of AGCO's sales are from outside the U.S. market. Brazil, Germany, France, the U.K. and Canada are among its largest foreign markets in terms of sales. CNH — known for its Case IH and New Holland machinery brands — also has a large exposure to the international market, while Deere generates most of its revenue in North America, followed by Europe and Latin America.
"We do believe demand in South America, specifically Brazil, will improve next year with a new administration lifting policy overhang, while the Brexit impact remains uncertain and we are expecting modest declines in Europe," Piper said.