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3 Farm Equipment Stocks to Watch Amid Industry Weakness
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Low commodity prices, supply-chain issues and inflated costs are headwinds for the Zacks Manufacturing - Farm Equipment industry at present. However, the industry will get support from the demand for agricultural equipment necessary to meet the food requirements of a growing population. The industry’s focus on revolutionizing agriculture with technology in an effort to make farming automated, easy to use and more precise across the production process is also likely to aid growth.
Players like Deere & Company (DE - Free Report) , AGCO Corporation (AGCO - Free Report) , and Alamo Group (ALG - Free Report) are well-poised to gain from cost-control measures and their efforts to bring technologically advanced products to the market.
About the Industry
The Zacks Manufacturing - Farm Equipment industry comprises companies that manufacture agricultural equipment. These include tractors, combines, cotton pickers and harvesting equipment; tillage, seeding and application equipment, consisting of sprayers, nutrient management and soil preparation machinery; and hay and forage equipment, comprising self-propelled forage harvesters and attachments, balers, and mowers. Some of these companies produce turf and utility equipment, consisting of riding lawn equipment and walk-behind mowers, golf course equipment, utility vehicles, commercial mowing equipment, and garden tillers and snow throwers. Some participants manufacture irrigation equipment. The industry players sell their equipment and related parts through independent retail dealer networks and retail outlets. This industry caters to the agriculture, golf and landscape markets.
Trends Shaping the Future of the Manufacturing - Farm Equipment Industry
Low Commodity Prices, High Costs are Concerning: Corn and soybean prices have declined lately amid improving supply prospects from key producers. Given that these are the most important grains for cash crop farming, this may impact farmer’s income levels. Also, farmers have been witnessing higher production costs. In the wake of declining prices, farmers may rein in their spending. The industry is also facing raw material cost inflation. Constraints on the availability of raw materials, labor and trucking resources have led to higher lead times for deliveries. Labor shortage might affect their production levels and impair their ability to meet demand. Consequently, the industry players are making every effort to bolster their financial condition, conserve cash and improve profitability. The companies have been implementing pricing and cost-reduction actions, which are likely to help sustain margins in the current scenario.
Growing Demand for Food to Sustain the Industry: The USDA (U.S. Department of Agriculture) projects net farm income at $136.9 billion for 2023, which is 15.9% lower than that reported in 2022. The decline is mainly due to elevated production expenses and lower direct government payments. Nevertheless, despite this decline, net farm income in 2023 will likely be 26.6% above the 20-year average (2002-2021) of $108.1 billion in inflation-adjusted dollars. This may impact the spending power of farmers. The need to replace aging equipment will sustain the demand for the industry. Farm size has been on the rise in the United States, which calls for more laborers. Given the escalation in labor costs every year, farmers are resorting to farming equipment to replace labor. Demand for agricultural equipment will continue to be supported by increased global demand for food from population growth and an increasing proportion of the population aspiring for better living standards. The U.S. agricultural machinery market is projected to reach $52.73 billion by 2027, seeing a CAGR of 3.3% over 2021-2027.
Technologically Advanced Products to Aid Growth: Customers are increasingly relying on advanced technology, smart farming solutions and mechanization to run their operations. Thus, the industry participants are enhancing investments in launching products equipped with advanced technologies and features to keep up with customers' evolving demands. Initiatives to advance precision agriculture technology will be a game-changer for the industry players, given its productivity-enhancing and sustainability benefits. Demand continues to grow for popular features, including automatic guide machines in the field and equipment that plants seeds, and applies chemicals and fertilizers with exceptional accuracy. Over the long term, the rising population and elevated global demand for food and efficient water use will fuel demand for the industry’s equipment.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Manufacturing - Farm Equipment industry is part of the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #199, which places it in the bottom 21% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak prospects for the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and valuation.
Industry Versus S&P 500 & Sector
The Zacks Manufacturing - Farm Equipment industry has outperformed its sector and the Zacks S&P 500 composite over the past 12 months. Stocks in this industry have gained 21.1% in the past 12 months against the S&P 500’s growth of 8.4%. The Industrial Products sector has gained 12.2% in the said time frame.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing farm equipment stocks, we see that the industry is currently trading at 11.23X compared with the S&P 500’s 11.39X. The Industrial Products sector’s forward 12-month EV/EBITDA is 14.58X. This is shown in the charts below.
Enterprise Value/EBITDA (EV/EBITDA) Ratio (F12M)
Enterprise Value/EBITDA (EV/EBITDA) Ratio (F12M)
Over the last five years, the industry has traded as high as 24.75X and as low as 9.47X, with the median being at 13.89X.
3 Manufacturing - Farm Equipment Stocks to Keep an Eye on
Deere: The company will continue to benefit from its focus on launching products equipped with advanced technologies and features that provide it with a competitive edge. Efforts to expand in precision agriculture will be a significant growth driver. Replacement demand, triggered by the need to upgrade old equipment, will continue to support its revenues. Considering that Deere also makes construction equipment, it will benefit from strong demand in the residential and non-residential construction markets. Its cost-control actions have been supporting margins despite the persistent inflationary pressures, leading to its 23% share price gain over the past year.
The Zacks Consensus Estimate for the Moline, IL-based company’s fiscal 2023 earnings has moved up 4% over the past 90 days and is pegged at $31.86. The estimate implies year-over-year growth of 37%. DE has a trailing four-quarter earnings surprise of 7.2%, on average. Deere has an estimated long-term earnings growth rate of 12.9% and currently carries a Zacks Rank #3 (Hold).
AGCO: The company has been gaining from improved farm dynamics and increasing replacement demand for old equipment. AGCO continues to invest in products, precision farming technology and smart farming solutions to improve distribution and enhance digital capabilities to strengthen product offerings. These efforts, along with favorable market demand and the company’s cost-control measures, have driven margin expansion across all regions over the past few quarters. Backed by these tailwinds, the stock has gained 21% in the past year.
The Zacks Consensus Estimate for the company’s fiscal 2023 earnings is pegged at $15.07 and suggests year-over-year growth of 21%. The consensus mark has moved up 5% over the past 90 days. AGCO has a trailing four-quarter earnings surprise of 16.4%, on average. The company has an estimated long-term earnings growth rate of 9.3%. This Duluth, GA-based leading manufacturer and distributor of agricultural equipment and related replacement parts currently carries a Zacks Rank #3.
Price & Consensus: AGCO
Alamo: Customer demand has been strong in the company’s end markets, which resulted in ALG achieving the highest quarterly sales and earnings in its history in the second quarter of 2023. Enhanced supply chain performance boosted sales, while a moderation in material cost inflation, improved efficiencies, and the company’s efforts to lower spending, supported margin expansion. The company’s Vegetation Management Division is benefiting from strong demand for agricultural, forestry, tree care, and governmental mowing products in North America and Europe. The Industrial Equipment segment is gaining from higher sales in all its product lines. A robust backlog bodes well for improved revenue performances in the forthcoming quarters. The company's shares have gained 37% in the past year.
The Zacks Consensus Estimate for the Seguin, TX-based company’s ongoing-year earnings has been revised 14% upward in 90 days’ time to $11.14 per share. The consensus mark projects a year over year growth of around 29%. ALG has a trailing four-quarter earnings surprise of 13%, on average. It currently carries a Zacks Rank #3.
Price & Consensus: ALG
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3 Farm Equipment Stocks to Watch Amid Industry Weakness
Low commodity prices, supply-chain issues and inflated costs are headwinds for the Zacks Manufacturing - Farm Equipment industry at present. However, the industry will get support from the demand for agricultural equipment necessary to meet the food requirements of a growing population. The industry’s focus on revolutionizing agriculture with technology in an effort to make farming automated, easy to use and more precise across the production process is also likely to aid growth.
Players like Deere & Company (DE - Free Report) , AGCO Corporation (AGCO - Free Report) , and Alamo Group (ALG - Free Report) are well-poised to gain from cost-control measures and their efforts to bring technologically advanced products to the market.
About the Industry
The Zacks Manufacturing - Farm Equipment industry comprises companies that manufacture agricultural equipment. These include tractors, combines, cotton pickers and harvesting equipment; tillage, seeding and application equipment, consisting of sprayers, nutrient management and soil preparation machinery; and hay and forage equipment, comprising self-propelled forage harvesters and attachments, balers, and mowers. Some of these companies produce turf and utility equipment, consisting of riding lawn equipment and walk-behind mowers, golf course equipment, utility vehicles, commercial mowing equipment, and garden tillers and snow throwers. Some participants manufacture irrigation equipment. The industry players sell their equipment and related parts through independent retail dealer networks and retail outlets. This industry caters to the agriculture, golf and landscape markets.
Trends Shaping the Future of the Manufacturing - Farm Equipment Industry
Low Commodity Prices, High Costs are Concerning: Corn and soybean prices have declined lately amid improving supply prospects from key producers. Given that these are the most important grains for cash crop farming, this may impact farmer’s income levels. Also, farmers have been witnessing higher production costs. In the wake of declining prices, farmers may rein in their spending. The industry is also facing raw material cost inflation. Constraints on the availability of raw materials, labor and trucking resources have led to higher lead times for deliveries. Labor shortage might affect their production levels and impair their ability to meet demand. Consequently, the industry players are making every effort to bolster their financial condition, conserve cash and improve profitability. The companies have been implementing pricing and cost-reduction actions, which are likely to help sustain margins in the current scenario.
Growing Demand for Food to Sustain the Industry: The USDA (U.S. Department of Agriculture) projects net farm income at $136.9 billion for 2023, which is 15.9% lower than that reported in 2022. The decline is mainly due to elevated production expenses and lower direct government payments. Nevertheless, despite this decline, net farm income in 2023 will likely be 26.6% above the 20-year average (2002-2021) of $108.1 billion in inflation-adjusted dollars. This may impact the spending power of farmers. The need to replace aging equipment will sustain the demand for the industry. Farm size has been on the rise in the United States, which calls for more laborers. Given the escalation in labor costs every year, farmers are resorting to farming equipment to replace labor. Demand for agricultural equipment will continue to be supported by increased global demand for food from population growth and an increasing proportion of the population aspiring for better living standards. The U.S. agricultural machinery market is projected to reach $52.73 billion by 2027, seeing a CAGR of 3.3% over 2021-2027.
Technologically Advanced Products to Aid Growth: Customers are increasingly relying on advanced technology, smart farming solutions and mechanization to run their operations. Thus, the industry participants are enhancing investments in launching products equipped with advanced technologies and features to keep up with customers' evolving demands. Initiatives to advance precision agriculture technology will be a game-changer for the industry players, given its productivity-enhancing and sustainability benefits. Demand continues to grow for popular features, including automatic guide machines in the field and equipment that plants seeds, and applies chemicals and fertilizers with exceptional accuracy. Over the long term, the rising population and elevated global demand for food and efficient water use will fuel demand for the industry’s equipment.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Manufacturing - Farm Equipment industry is part of the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #199, which places it in the bottom 21% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak prospects for the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and valuation.
Industry Versus S&P 500 & Sector
The Zacks Manufacturing - Farm Equipment industry has outperformed its sector and the Zacks S&P 500 composite over the past 12 months. Stocks in this industry have gained 21.1% in the past 12 months against the S&P 500’s growth of 8.4%. The Industrial Products sector has gained 12.2% in the said time frame.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing farm equipment stocks, we see that the industry is currently trading at 11.23X compared with the S&P 500’s 11.39X. The Industrial Products sector’s forward 12-month EV/EBITDA is 14.58X. This is shown in the charts below.
Enterprise Value/EBITDA (EV/EBITDA) Ratio (F12M)
Enterprise Value/EBITDA (EV/EBITDA) Ratio (F12M)
Over the last five years, the industry has traded as high as 24.75X and as low as 9.47X, with the median being at 13.89X.
3 Manufacturing - Farm Equipment Stocks to Keep an Eye on
Deere: The company will continue to benefit from its focus on launching products equipped with advanced technologies and features that provide it with a competitive edge. Efforts to expand in precision agriculture will be a significant growth driver. Replacement demand, triggered by the need to upgrade old equipment, will continue to support its revenues. Considering that Deere also makes construction equipment, it will benefit from strong demand in the residential and non-residential construction markets. Its cost-control actions have been supporting margins despite the persistent inflationary pressures, leading to its 23% share price gain over the past year.
The Zacks Consensus Estimate for the Moline, IL-based company’s fiscal 2023 earnings has moved up 4% over the past 90 days and is pegged at $31.86. The estimate implies year-over-year growth of 37%. DE has a trailing four-quarter earnings surprise of 7.2%, on average. Deere has an estimated long-term earnings growth rate of 12.9% and currently carries a Zacks Rank #3 (Hold).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price & Consensus: DE
AGCO: The company has been gaining from improved farm dynamics and increasing replacement demand for old equipment. AGCO continues to invest in products, precision farming technology and smart farming solutions to improve distribution and enhance digital capabilities to strengthen product offerings. These efforts, along with favorable market demand and the company’s cost-control measures, have driven margin expansion across all regions over the past few quarters. Backed by these tailwinds, the stock has gained 21% in the past year.
The Zacks Consensus Estimate for the company’s fiscal 2023 earnings is pegged at $15.07 and suggests year-over-year growth of 21%. The consensus mark has moved up 5% over the past 90 days. AGCO has a trailing four-quarter earnings surprise of 16.4%, on average. The company has an estimated long-term earnings growth rate of 9.3%. This Duluth, GA-based leading manufacturer and distributor of agricultural equipment and related replacement parts currently carries a Zacks Rank #3.
Price & Consensus: AGCO
Alamo: Customer demand has been strong in the company’s end markets, which resulted in ALG achieving the highest quarterly sales and earnings in its history in the second quarter of 2023. Enhanced supply chain performance boosted sales, while a moderation in material cost inflation, improved efficiencies, and the company’s efforts to lower spending, supported margin expansion. The company’s Vegetation Management Division is benefiting from strong demand for agricultural, forestry, tree care, and governmental mowing products in North America and Europe. The Industrial Equipment segment is gaining from higher sales in all its product lines. A robust backlog bodes well for improved revenue performances in the forthcoming quarters. The company's shares have gained 37% in the past year.
The Zacks Consensus Estimate for the Seguin, TX-based company’s ongoing-year earnings has been revised 14% upward in 90 days’ time to $11.14 per share. The consensus mark projects a year over year growth of around 29%. ALG has a trailing four-quarter earnings surprise of 13%, on average. It currently carries a Zacks Rank #3.
Price & Consensus: ALG