We like Deere & Company (DE) as a franchise but it’s exposed to export markets, which has made other equipment manufacturers cautious in recent weeks as they move into the back half of 2012. While equipment sales have remained elevated in recent years, there could soon be a shift in the market that leads to a decline in purchases. Trading around $77, we think the stock is too expensive at the moment to own. $20-30 lower is what we would consider our “sweet spot.”
A note about the relationship between crop exports and the relationship they share with Deere follows, courtesy of Industrials Sector Head Jay Van Sciver:
• Exports & Dollar: Over the long-term, crop exports have a significant relationship to DE’s relative performance. The shares are also generally negatively correlated with the dollar, which has generally been strengthening in recent months. DE is increasingly less dependent on the US market, which may reduce these relationships over time.