Takeaway: El Nino correlates to weather, and weather correlates to DE. But the direction is not so obvious. We would view fleet dynamics as more important. Volatility in weather is more of a risk to our short thesis than a further support of it.
Replay & Materials From Ag Equipment Black Book:
- Slides: CLICK HERE
- Replay: CLICK HERE
Short DE Best Ideas Addition (5/22/2015)
Where To From Here? (9/21/2015)
This is just a quick response to a bearish El Nino narrative circling farm equipment this week, in particular DE and AGCO. For us, what is likely to matter most to farm equipment sales are fleet demographics and farm income trends. We think we are in a period were the former is most critical. Ongoing commentary from dealers and the advance orders support our more negative view.
However, inflections in El Nino do appear to correspond well to inflections in DE’s relative performance. Over the past decade, a short sample period for industrial equipment, the DE-El Nino correlation has been negative. However, a longer series shows that the relationship with El Nino is not particularly consistent or, most likely, useful. Unfortunately for DE, volatile weather cannot undo years of above trend farm equipment investment, aggressive pricing actions by inventory sodded competitors, or decrease stocks of used equipment.
Upshot: El Nino correlates to weather, and weather correlates to DE. But the direction is not so obvious. We would view fleet dynamics as more important. Volatility in weather is more of a risk to our short thesis than a further support of it.
