This morning, two separate banking houses took aim at the farm industry. On the bad news front, Berenberg announced a new sell rating for farm equipment maker Deere. However, the news looks good for fertilizer producers, with Cowen & Co. announcing a series of upgrades for Potash (NYSE:POT), Mosaic (NYSE:MOS), and CF Industries (NYSE:CF) -- all now rated market perform -- and an upgrade all the way to outperform for Agrium.
Five new ratings to consider. Here are three things you need to know about 'em.
1. Deere in the headlights
Let's start off with Berenberg's sell rating on Deere -- because that's the one that StreetInsider.com has the most detail on.
In a word, Berenberg is pessimistic about Deere because, while it agrees with other analysts that Deere will probably earn in the neighborhood of $4.50 per share this year, Berenberg is forecasting "18% below consensus" for 2018. Based on Yahoo! Finance's consensus projection of $5.25 for 2018, that means Berenberg thinks Deere's earnings will drop by $0.20 next year, instead of rising by $0.75.
2. Why so glum, chum?
What has Berenberg feeling so pessimistic about Deere? In contrast to its peers, the analyst says it expects to see "no meaningful recovery in agricultural equipment spending in North America and Europe in 2018," predicting instead a "flat at best" market.
In such a flat market, Berenberg also sees a risk in the form of customer defaults on the $38 billion in customer financing that Deere has extended, creating the "potential for asset writedowns" that would pinch Deere's profits -- and result in an earnings miss. Such an eventuality would also, warns Berenberg, create the potential for credit raters to downgrade Deere's credit rating, might prevent stock buybacks, and could even force a dividend cut at the agricultural equipment maker.
3. Hope sprouts eternal
Cowen & Co. seems to be espousing a slightly more optimistic view of the agricultural industry. While not speaking on Deere's prospects in particular, TheFly.com is reporting this morning that Cowen has raised its rating on the "Agricultural Chemicals" industry to neutral. Says Cowen, investors have priced in most of the "negative factors" affecting agricultural stocks, and there's no longer enough downside to justify selling stocks like Potash, Mosaic, or CF Industries. Indeed, Cowen actually sees reason to buy one of these fertilizer stocks, Agrium.
Why might this be? There's not a huge amount of detail available on Cowen's upgrades at this time, but TheFly notes that one of Cowen's peers, OTR Global, is also optimistic that nitrogen producers will enjoy rising prices this year. Says OTR, U.S. dealers have been holding back on buying fertilizer for the spring (possibly in anticipation of further price declines). Meanwhile, Chinese urea producers have been slow to increase production.
The combination of low supply (from China) with pent-up demand (from the U.S.) could give rise to higher prices on nitrogen and other fertilizers this year, boosting both sales and profits for Agrium and its peers.
Bonus thing: How do the valuations look?
Is Cowen right about this? Or is Berenberg's more pessimistic view the better way to look at the farm industry and agricultural stocks?
That's hard to say until we see which way prices move. What we can tell you, though, is that after enjoying strong price gains over the past year (Mosaic is up 38%, Agrium's up 24%, and both CF Industries and Potash gained 23%), the four fertilizer stocks that Cowen upgraded today appear priced as if a bull market for fertilizer is already a given. All for stocks sell for 20 times trailing earnings or above, despite the fact that according to S&P Global Market Intelligence estimates, none of them are expected to grow earnings even as much as 10% annually over the next five years. If you ask me, that's a risky bet -- especially with Berenberg making such a bold prediction to the contrary, and especially with no one knowing for sure which way prices will move. Similarly, Deere at a price-to-earnings ratio of 22.2 looks pricey relative to S&P Global projections of 6% long-term growth.
So long story short? I'm in agreement with Berenberg that investors have been overoptimistic about Deere, and that there's still plenty of risk in the stock. By the same token, I worry that Cowen has jumped the gun in declaring an all-clear for the fertilizer producers. If you ask me, there's still plenty of risk buried in there, as well.