Morgan Stanley: Another Bad Year For Deere In 2015

A recent report by Morgan Stanley includes a dreary forecast for farming equipment manufacturers. Analyst Nicole DeBlase predicts below-consensus earnings for industry leaders in 2015 and further declines in 2016.

The report identifies five factors putting pressure on agriculture equipment manufacturing in the next two years.

1. The USDA estimates that farmer cash receipts will continue to decline through 2016.

Analysts point out the strong past correlation between cash receipts and equipment demand.

2. The age of the current agriculture equipment fleet is at a record low.

Morgan Stanley’s recent agriculture survey indicates that the average age of tractors is currently only seven years vs. the typical lifespan of 15 years.

3. Equipment inventories continue to grow.

A recent dealer survey indicates that around 28 percent of manufacturers are holding excess new inventory, and used equipment prices have fallen as much as 5 percent lately due to excess supply.

4. There is uncertainty among farmers about worldwide policy changes that could be coming.

New laws concerning taxes, subsidies and other agricultural issues could be coming soon in the United States, Brazil and Europe. Until farmers know the details of these potential policy changes, they will likely be cautious when it comes to spending on equipment.

5. The value of farmland is falling.

For the approximately 60 percent of farmers that own their land, the land itself is the biggest asset they have and serves as the collateral for necessary loans.

Analysts believe that these five factors will weigh on the performance of manufacturers in 2015. Morgan Stanley predicts 2015 EPS of 5 percent below consensus for Deere & Company (NYSE: DE) and EPS of 7 percent below consensus for AGCO Corporation (NYSE: AGCO).