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Behind Baird's bullish call on Deere

Baird's bullish call on Deere
Key Points
  • R.W. Baird upgraded Deere to “outperform” from “neutral”
  • Baird cites the elevated price of corn and other commodities due to bad weather
  • This is expected to also spur demand for farm equipment

Shares of Deere powered higher on Monday as R.W. Baird upgraded the stock to an "outperform" rating. The firm says potential benefits from extreme weather conditions overshadow any risks from the Trade War.

Bad weather in the Midwest has driven up the price of corn and other commodities, which the analyst believes will spur demand for farm equipment.

"Corn has rallied sharply breaking out of a five-year range as persistent wetness has raised supply concerns," Baird analyst Mircea Dobre wrote in a note Monday. "Prices seem poised to move higher; this helps farm economics which should drive equipment demand."

Dobre raised his price target on Deere to $175 – about 16 percent higher than recent trading levels. On May 13th, he downgraded the farm-equipment manufacturer to a "neutral" rating with a $129 target. Shares had fallen nearly 3 percent since then through last Friday's closing price of $151.51.

Former Deere shareholder and Ritholtz Wealth Management CEO Josh Brown agrees with Baird's bullish call on the stock.

"If you take a look at the chart, Deere started to break out in the middle of May. It stopped trading on tariff headlines, started trading on corn prices which are now going up," Brown said on Monday's "Halftime Report".

Corn prices and machinery demand are correlated, with machinery volumes usually on a one-year lag to corn prices, Baird says, while also noting "equipment purchases are a great tool for farmers to reduce tax liability which combines with already present replacement demand."

Last month, Deere blamed rising U.S.-China trade tensions for its downbeat earnings and full-year forecast. That outlook has put pressure on shares, with Deere's stock gaining only 3.5 percent year-to-date – lagging the Dow Jones Industrial Average's 12 percent rise.