Deere's Earnings Show that Valuation's Excessive; Reiterate Sell

5/15 - "Although DE’s unchanged 2008 net income outlook
(higher Ag revenue offset by cost/margin headwinds) takes some near-term momentum from the story, we continue to view the company as the best way to participate in an Ag cycle that we expect to remain strong, supported by rising farm income, elevated crop prices, and low crop inventories. We maintain our Buy rating and $94 target price."

"2Q08 EPS of $1.74 beat our $1.72 but trailed cons of $1.75, as better than expected Ag and C&CE margins (Ag incremental of 24.5% beat our 23.7%) offset equipment revenue of $7.47b that trailed our est by $200m. Net income of $764m compared w/ DE’s $700-$725m target...DE raised its FY08 net sales outlook to ~20% yr/yr vs. its previous +17%, including stronger Ag and an extra two pts of currency."

"We trimmed FY08 EPS to $5.10 from $5.15 as higher Ag revs are offset by lower margins (net income to $2.23b from $2.25b); we kept 2009 EPS at $6.20 w/ higher Ag revs and some improved pricing/cost balance assumption as mid-year ’08 price increases will help next year. With large machines essentially sold out for 2008 and DE not repricing backlog, the current year is not expected to see much benefit."

"As before, our (target price) is approximately 16.3x our CY2008/09 EPS estimates."

5/15 - "Wednesday’s sell-off post the stock’s run up into the quarter may seem tempting as an opportunity add to positions but we’d advise time sensitive investors to be patient as DE stk likely stalls near-term through the July Machinery earnings season as angst increases across the group that rising material costs, a strengthening US dollar and a potentially flattening yield curve are signals to take some profits after the group’s outperformance year to date. DE also erred, in our view, by not providing more disclosure on how it gets to its increased y-o-y material & freight cost increase."

"...the ag cycle is alive & well with developing Russia/CIS (markets) not fully appreciated by the Street, DE pricing actions likely getting at least back in line with cost inflation in ’09, & DE is the “best of breed” way to play ag in Machinery with the stk having support in the high $70s (13x Street likely staying $6+ in ’09)."

"We rate the shares of Deere & Co Buy/ Medium Risk (1M). With the current high level of domestic & potentially global industrial economic uncertainty, the relatively assured near-term demand in the ag equipment markets has value...Our target price for Deere is $98."