Terex Corporation (TEX), AGCO Corporation (AGCO), Deere & Company (DE): Thursday’s Top Upgrades (and Downgrades)

Add in the prospect of a 12.5% projected growth rate at AGCO, and a modest 0.7% dividend yield, and to be perfectly honest, I think AGCO is actually a better bet than Morgan Stanley’s top pick (Terex).

Deere & Company (NYSE:DE) in the headlights
Now let’s turn to the one machinery stock that Morgan Stanley really loves to hate: Deere & Company (NYSE:DE) Company. Out of the six stocks that Morgan Stanley initiated coverage on Thursday, the others being Caterpillar, Joy Global, and Manitowoc, Deere & Company (NYSE:DE) was the only stock tagged with Morgan Stanley’s underweight rating. Why?

According to StreetInsider.com, Morgan Stanley worries that “weakening ag demand” will sap Deere & Company (NYSE:DE)’s strength. On the one hand, this argument doesn’t seem to make much sense, given that Morgan Stanley gave high marks to a company literally named for the agricultural industry — AGCO. On the other hand, however, Deere & Company (NYSE:DE) shares are not nearly as attractively priced as those of AGCO.

Deere & Company (NYSE:DE) stock may sell for only “9.5 times earnings,” according to Yahoo! Finance. However, the fact that analysts only expect to see Deere grow its earnings at 8% per year over the next five years means that this 9.5-times-earnings price doesn’t buy you nearly as much growth at Deere as does AGCO’s 10.4-P/E.

What’s more, with trailing free cash flow of only $461 million, according to S&P CapitalIQ, versus reported GAAP earnings of $3.4 billion, Deere shares may actually cost far more than they appear to cost. That’s not a risk investors need to fear when buying into AGCO, which generates more free cash flow that reports as GAAP earnings.

Foolish takeaway
Long story short, I’m broadly in agreement with Morgan Stanley’s recommendations today, with the sole proviso that while I agree that Terex is attractive, and Deere unattractive, I still think that AGCO is the best buy of the three.

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of Terex.

The article Thursday’s Top Upgrades (and Downgrades) originally appeared on Fool.com is written by Rich Smith.

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