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Near-Term Outlook Looks Bleak for Farm Equipment Industry
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The Zacks Manufacturing - Farm Equipment industry primarily comprises companies that manufacture agricultural equipment. These include tractors, combines, sprayers, harvesting equipment, hay and forage equipment, seeding and tillage equipment, and related parts.
Some of these companies also produce turf and utility equipment, comprising riding lawn equipment and walk-behind mowers, golf course equipment, utility vehicles, commercial mowing equipment, and garden tillers and snow throwers. Notably, some of the companies also provide irrigation equipment.
The industry participants sell their equipment and related parts through independent retail dealer networks and retail outlets. This industry caters to agriculture, golf and landscape markets.
Let us take a look at the three major themes currently governing the industry:
The Manufacturing - Farm Equipment industry has been plagued with tariff and trade concerns as exports account for about 20% of U.S. farm income. Higher tariffs disrupted normal marketing patterns, escalating costs by compelling producers to seek new markets in order to clear the surplus stock. Moreover, stringent and cumbersome entry procedures affected the quality and marketability of perishable crops, elevating marketing costs for producers. Further, rise in fuel, chemical and fertilizer costs have been straining the industry’s margins.
Per the U.S. Department of Agriculture's (USDA) latest available projections, net farm income is anticipated to be up 4.8% year over year in 2019. Improving farm income will enable farmers to invest in equipment purchases. Further, the USDA’s $16-billion aid for the trade-war affected American farmers will boost equipment purchases. Also, the partial trade deal with China and the nation agreeing to the purchase of U.S. farm products worth $40-$50 billion bode well for the industry. Farm equipment demand will also be sustained by the need to replace the aging equipment. Inclement weather has delayed the planting season in most productive farming regions in the United States, which negatively impacted crop supply, while demand remained high. This imbalance will support prices, which bodes well for farmers. Long-term demand for the industry’s equipment will be fueled by increased global demand for food and efficient water use.
With customers increasingly relying on advanced technology and mechanization to run their operations, the companies in the industry are also now enhancing their precision farming capabilities, in order to keep up with evolving demands. Remarkably, these advancements use predictive analytics to generate notifications and repair instructions to minimize machine downtime, coordinate machines to execute jobs more efficiently. Initiatives to expand in the precision agriculture technology will be a game changer for the industry players.
Zacks Industry Rank Indicates Dismal Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy prospects in the near term. The Manufacturing - Farm Equipment industry, which is part of the broader Industrial Products Sector, currently carries a Zacks Industry Rank #171, which places it at the Bottom 33% of 254 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate.
Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since the beginning of this year, the industry’s earnings estimate for the current year has declined 14%.
Despite the bleak near-term prospects, we will present a few Manufacturing – Farm Equipment stocks that one can retain, supported by their growth prospects. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Outperforms S&P 500 and Sector
The Manufacturing - Farm Equipment industry has outperformed the S&P 500 and the sector over the past year. While the stocks in this industry have collectively gained 17.9%, the Zacks S&P 500 grew 12.2%. Meanwhile, the Zacks Industrial Products Sector gained 3.7%.
One-Year Price Performance
Manufacturing - Farm Equipment Industry Valuation
On the basis of 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 15.60X compared with the S&P 500’s 12.10X. The Industrial Products sector’s forward 12-month EV/EBITDA is at 16.98X. 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 78.30X and as low as 11.97X, with the median being at 16.96X.
Bottom Line
The Manufacturing - Farm Equipment industry is currently under pressure from raw material and freight cost headwinds. However, price hikes and prudent cost management will help sustain margins. Resolution of the trade war, USDA’s $16-billion relief package and China buying agricultural products will fortify the industry. Farm equipment demand will eventually pick up, spurred by the need to replace ageing equipment. Moreover, benefits from Precision Agriculture initiatives will help over the long haul.
Deere & Company (DE - Free Report) : The Zacks Consensus Estimate for this Moline, IL-based company's fiscal 2019 EPS reflects year-over-year growth of 5.96%. The projected long-term earnings growth rate for the company is 6.7%.
Price and Consensus: DE
AGCO Corporation (AGCO - Free Report) : This Duluth, GA-based company’s Zacks Consensus Estimate for 2019 earnings indicates year-over-year growth of 30.08%. The company has an estimated long-term earnings growth rate of 13.8%. It has an average positive earnings surprise of 32.7% for the trailing four quarters.
Price and Consensus: AGCO
Alamo Group Inc. (ALG - Free Report) : The Zacks Consensus Estimate for this Seguin, TX-based company's current-year earnings suggests year-over-year growth of 4.5%. The company has an estimated long-term earnings growth rate of 10%.
Price and Consensus: ALG
Lindsay Corporation (LNN - Free Report) : The Zacks Consensus Estimate for this Omaha, NE-based company's fiscal 2020 earnings calls for a year-over-year jump of 76.5%.
Price and Consensus: LNN
Free: Zacks’ Single Best Stock Set to Double
Today you are invited to download our latest Special Report that reveals 5 stocks with the most potential to gain +100% or more in 2020. From those 5, Zacks Director of Research, Sheraz Mian hand-picks one to have the most explosive upside of all.
This pioneering tech ticker had soared to all-time highs and then subsided to a price that is irresistible. Now a pending acquisition could super-charge the company’s drive past competitors in the development of true Artificial Intelligence. The earlier you get in to this stock, the greater your potential gain.
Image: Bigstock
Near-Term Outlook Looks Bleak for Farm Equipment Industry
The Zacks Manufacturing - Farm Equipment industry primarily comprises companies that manufacture agricultural equipment. These include tractors, combines, sprayers, harvesting equipment, hay and forage equipment, seeding and tillage equipment, and related parts.
Some of these companies also produce turf and utility equipment, comprising riding lawn equipment and walk-behind mowers, golf course equipment, utility vehicles, commercial mowing equipment, and garden tillers and snow throwers. Notably, some of the companies also provide irrigation equipment.
The industry participants sell their equipment and related parts through independent retail dealer networks and retail outlets. This industry caters to agriculture, golf and landscape markets.
Let us take a look at the three major themes currently governing the industry:
Zacks Industry Rank Indicates Dismal Prospects
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy prospects in the near term. The Manufacturing - Farm Equipment industry, which is part of the broader Industrial Products Sector, currently carries a Zacks Industry Rank #171, which places it at the Bottom 33% of 254 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate.
Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since the beginning of this year, the industry’s earnings estimate for the current year has declined 14%.
Despite the bleak near-term prospects, we will present a few Manufacturing – Farm Equipment stocks that one can retain, supported by their growth prospects. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Outperforms S&P 500 and Sector
The Manufacturing - Farm Equipment industry has outperformed the S&P 500 and the sector over the past year. While the stocks in this industry have collectively gained 17.9%, the Zacks S&P 500 grew 12.2%. Meanwhile, the Zacks Industrial Products Sector gained 3.7%.
One-Year Price Performance
Manufacturing - Farm Equipment Industry Valuation
On the basis of 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 15.60X compared with the S&P 500’s 12.10X. The Industrial Products sector’s forward 12-month EV/EBITDA is at 16.98X. 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 78.30X and as low as 11.97X, with the median being at 16.96X.
Bottom Line
The Manufacturing - Farm Equipment industry is currently under pressure from raw material and freight cost headwinds. However, price hikes and prudent cost management will help sustain margins. Resolution of the trade war, USDA’s $16-billion relief package and China buying agricultural products will fortify the industry. Farm equipment demand will eventually pick up, spurred by the need to replace ageing equipment. Moreover, benefits from Precision Agriculture initiatives will help over the long haul.
We are presenting four stocks with a Zacks Rank #3 (Hold) that are well poised to grow. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Deere & Company (DE - Free Report) : The Zacks Consensus Estimate for this Moline, IL-based company's fiscal 2019 EPS reflects year-over-year growth of 5.96%. The projected long-term earnings growth rate for the company is 6.7%.
Price and Consensus: DE
AGCO Corporation (AGCO - Free Report) : This Duluth, GA-based company’s Zacks Consensus Estimate for 2019 earnings indicates year-over-year growth of 30.08%. The company has an estimated long-term earnings growth rate of 13.8%. It has an average positive earnings surprise of 32.7% for the trailing four quarters.
Price and Consensus: AGCO
Alamo Group Inc. (ALG - Free Report) : The Zacks Consensus Estimate for this Seguin, TX-based company's current-year earnings suggests year-over-year growth of 4.5%. The company has an estimated long-term earnings growth rate of 10%.
Price and Consensus: ALG
Lindsay Corporation (LNN - Free Report) : The Zacks Consensus Estimate for this Omaha, NE-based company's fiscal 2020 earnings calls for a year-over-year jump of 76.5%.
Price and Consensus: LNN
Free: Zacks’ Single Best Stock Set to Double
Today you are invited to download our latest Special Report that reveals 5 stocks with the most potential to gain +100% or more in 2020. From those 5, Zacks Director of Research, Sheraz Mian hand-picks one to have the most explosive upside of all.
This pioneering tech ticker had soared to all-time highs and then subsided to a price that is irresistible. Now a pending acquisition could super-charge the company’s drive past competitors in the development of true Artificial Intelligence. The earlier you get in to this stock, the greater your potential gain.
Download Free Report Now >>