Hedgeye Industrials analyst Jay Van Sciver is hosting a call today with institutional customers laying out his short thesis on shares of Deere (DE). Here's a taste. Email sales@hedgeye.com for more information.
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Deere longs we meet with are extremely confident -- that’s a 180 degree turn from just a year ago. While many believe the bottom is in for North American agricultural equipment, that view is not well supported by data. Instead, we believe a cessation of underproduction, aggressive pricing from Deere Financial, and higher South American sales have been mistaken by investors for a turn in the key North American market.
We think the long case for Deere suffers from several analytical inconsistencies and off-target narratives. As these factors roll into very high FY18 profit expectations, we see the potential for 40-50% relative downside in shares of DE, just after most bears have gone into hibernation.
What Happened With South America, And What Is Next? Crop prices in South America boomed in both local currencies and U.S. dollars. Not shockingly, although we dropped the ball, equipment sales followed. Crop prices are now setting local lows, and equipment sales look to have turned negative. Excess inventory in the market could become the next issue if production isn’t scaled back.
A Turnaround In The U.S. & Canada Ag Equipment Market? Aside from the normalization of production after a channel destock, we don’t see a turn in demand or North American profitability. Given increased production, surging in Construction & Forestry sales in the quarter, and the company’s (much hyped) cost plan, one might have expected progress on U.S. & Canada margins in FY3Q17. U.S. and Canada Ag & Turf margins were likely sequentially lower.
Email sales@hedgeye.com for more information.