Shares of Deere are a buy even as growing recession concerns hit machinery stocks, according to Citi. The firm cut estimates and reduced price targets across the board for the group to reflect a broader slowdown. But shares of Deere were upgraded to buy from neutral, with Citi analyst Timothy Thein saying in a Thursday note the farm equipment manufacturer remains “attractive” given its competitive position in the market. Thein said he prefers higher quality machinery names that can handle growing inflationary pressures. “We remain constructive on the company’s competitive positioning within its core Ag equipment markets, particularly in the Americas with respect to its dealer base, brand and precision ag offerings,” Thein wrote. Citi slashed Deere’s price target by about 20% to $340 from $435. The new price target implies roughly 13% upside from where shares were trading Thursday. The analyst believes that a huge backlog for farm equipment will help machinery stocks in the near term. A shortage of tractors, crop sprayers and other equipment means Deere could pass through higher prices to farmers. “We also see the potential for an extended upcycle in large ag on account of supply chain constraints, which have limited the flow of both new and used equipment (and thus inventories),” Thein added. “This should help contribute to a structurally higher margin.” Shares of Deere are also at a “more attractive entry point” after tumbling about 12% this year. To be sure, the company will have to contend with rising costs for raw materials, as well as inclement weather events that could diminish a farmers’ ability to pay for new machinery and parts. Still, the analyst expects the stock could outpace the target price if those headwinds are less severe than anticipated. Shares of Deere jumped more than 5% in Thursday trading. —CNBC’s Michael Bloom contributed to this report.
© heardonwallstreet.com