Sector Snap: Machinery stocks sink

Deere's stock fell $2.81, or 5.7 percent, to $46.72 in afternoon trading, after touching a multi-year low of $46.05 earlier in the session. Meanwhile, shares of Agco lost $1.17, or 2.8 percent to $41.41. Both companies' shares have slid along with the broader market, declining 10.5 percent and 7.1 percent, respectively, since Monday.

"We believe recent credit market volatility and broader economic weakness may limit farm equipment demand," said Henry Kirn, an analyst for UBS Investment Research, in a note to clients. Adding, further deterioration in U.S. nonresidential construction market could also impact equipment demand.

Nonresidential building has been coming under more pressure as banks, battered by big losses on mortgage loans, have tightened their lending standards for offices, factories, malls and hotels.

Kirn slashed his price targets for Duluth, Ga.-based Agco to $42 from $54, and Moline, Ill.-based Deere to $54 from $77.

The Commerce Department on Wednesday reported that construction activity remained unchanged in August even though spending for residential projects saw its first increase in 17 months. Wall Street had expected construction activity to decline 0.5 percent.

Stocks of such companies may continue to get negatively impacted as agricultural commodity prices continue to decline, he said.

"The primary risk to farm machinery stocks is that deterioration in agricultural commodity prices could result in weakness in machinery sales and earnings, which could put downward pressure on stocks," wrote Kirn.

The severe slump in housing has brought the entire economy close to a recession, and resulted in a severe credit crunch as banks have been forced to take billions of dollars of losses as mortgage defaults have soared to record levels.

The UBS analyst also maintained his fiscal 2008 earnings estimate for Deere at $4.90 per share, but lowered his fiscal 2009 estimate by 10 cents to $5.50 per share to reflect lower sale growth than previously thought.