The Global Demographic Tailwind

[DewDiligence]

Morgan Joseph Upgrades DE, Sets $75 Price Target

http://online.barrons.com/article/SB127543265420899749.html

›JUNE 2, 2010
Analyst: Charles E. Mitchell Rentschler

We are raising our rating on Deere (ticker: DE) to Buy from Hold.
Our earnings-per-share estimates for fiscal 2010 (ending Oct. 30) have climbed from $2.25 per share to $3.10 and, now, to $3.80, due to exceptionally strong demand from U. S. row-crop farmers buying combines and tractors, continued brisk business in Brazil, and the emergence of domestic construction-equipment out of a five-year recession.

It is our belief that Deere will earn $5.00 per share next year [i.e. the FY ending Oct 2011], mostly because American farmers (as we have written ad infinitum due to ethanol) are likely to continue to enjoy very high levels of prosperity and to buy "big iron" even if prices go up 4%-5% because of the implementation of "Interim IV" emissions laws.

Evidently satisfied with recent additions to the capacity of its tractor plant in Waterloo, Iowa, and its combine factory in East Moline, Ill., the company is hugely benefiting from mix: the bigger the machine, the more money Deere makes -- it's that simple.

Wealthy American farmers who buy this gear can trade in these machines after two to three years at a percentage loss far less significant than an automobile, given sustained robust after-market demand.

Additionally, while we see no significant improvement in 2011 in Europe (West or East), we believe Deere's construction-equipment sector (90% North American) should see increasing prosperity. And Brazil's farm economy, unaffected by upcoming presidential elections, should remain strong, in our view, due to the favorable outlook for soybeans and cane sugar.

We are setting a price target of $75, or 15 times our 2011 EPS estimate, a multiple justified by historical levels, in our opinion.‹