What happened
Shares in the agriculture and construction machinery maker Deere & Company(NYSE: DE) were down by 4% at 10 a.m. ET Thursday. The move comes in the aftermath of an analyst downgrade a few days earlier and continued declines in key prices for crops like corn, wheat, and soybeans.
So what
Evercore ISO(NYSE: EVR) analyst David Raso cut his price target to $424 from $456 and downgraded the stock to in-line from outperform.
In reality, an in-line rating implies a sell because if a company is only estimated to perform in line with the market or its sector, then there's no reason to take on extra stock-specific risk by holding Deere stock rather than buying the market or its sector via an exchange-traded fund. Raso's concern is that slowing production levels in South America will lead to lower sales volumes in key markets like Brazil.
In addition, corn, wheat, and soybean prices are down sharply over the last week, recording declines of 1.4%, 2.2%, and 4.3%, respectively. Wheat is at a yearly low, and corn and soybeans are close to theirs.
In a sense, the weakening outlook in South America is priced into the stock because, on the third-quarter earnings call in August, management downgraded its ag and turf industry full-year growth outlook for South America (tractors and combines) to a range of flat to down 5% from a previous outlook of flat.
Image source: Getty Images.
Now what
The ongoing decline in crop prices is probably more of a concern because farmers' spending on equipment tends to follow their crop income, and crop prices usually lead that. As such, continued declines could signal a cyclical high in Deere's revenue and earnings -- something to look out for.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool recommends Deere. The Motley Fool has a disclosure policy.
