Wells Fargo Downgrades Deere And Caterpillar, Sees 'Likely Need To Cut Production Soon'

Construction stocks have lagged the market so far in 2019, but one analyst said Thursday his latest checks suggest there’s no relief in sight for Deere & Company DE and Caterpillar Inc. CAT.

The Analyst

Wells Fargo analyst Andrew Casey downgraded Deere from Outperform to Market Perform and reiterated his $170 price target.

Casey also downgraded Caterpillar from Outperform to Market Perform and cut his price target from $150 to $143.

The Thesis

Casey said his latest checks suggest the U.S. construction cycle is at or near its peak, and Deere and Caterpillar will likely face earnings pressure starting in 2020.

Industry insiders told Wells Fargo that demand for new equipment is dropping, backlogs are shrinking, and inventories are rising. At the same time, more customers are reportedly interested in renting equipment rather than buying.

“Coming into Q3 19, dealers expected an activity surge to reduce inventories, but we found no evidence of destocking this quarter. Our takeaway is manufacturers will likely need to cut production soon,” Casey wrote in the note.

Casey said single-digit growth in Caterpillar’s Resource Industries and slight compression in Energy and Transportation will not be able to make up for a softening U.S. construction equipment market.

For Deere, Casey said potential weakness in construction equipment overshadows a strong cyclical positioning in large farm equipment.

Benzinga’s Take

Deere and Caterpillar are both relatively low-multiple stocks that pay dividends and are exposed to the cyclical construction market. Whether or not this downgrade represents a chance to cash out of the names depends on whether or not investors are willing to ride out a potential cyclical downturn and stick with these top-tier construction stocks for the long-term.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

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