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Near-Term Prospects Look Bright 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 these 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 struggling with waning demand and lower commodity prices due to the coronavirus pandemic. The livestock and dairy market registered a decline due to the overall disruption of the food supply chain and changes in consumption patterns. Prices of soybean and corn remain under pressure. Corn prices have plummeted as ethanol demand has dropped on lower gasoline usage, thanks to the stay-at-home orders. Apart from this, the pandemic has dealt a severe blow to U.S agricultural exports, which was already reeling under the trade spat with China. The pandemic has also raised concerns that China might be unable to fulfill its commitment to purchase U.S. farm products under the phase one trade deal. Thus, farmers have been adopting a cautious stance due to the current uncertainties.
     
  • The $16-billion COVID-19 aid package announced by the U.S Department of Agriculture (USDA) for U.S. farmers and livestock producers will help offset the pandemic’s impact to some extent. Per the USDA’s report, net farm income is anticipated to be up 3.3%, year over year, to $96.7 billion in 2020. Improving farm income will enable farmers to invest in new equipment purchases. Planted acres for soybeans are expected to rebound this year, while corn acres are projected to be higher in the United States, in turn, boosting crop demand. Moreover, increasing replacement demand for age old equipment will keep spurring demand for farm equipment. Lower fuel and fertilizer costs will also likely help sustain margins.
     
  • With customers increasingly relying on advanced technology and mechanization to run their operations, the companies in the industry are now enhancing their precision farming capabilities, in order to keep up with the evolving demands for agricultural equipment. Elevated global demand for food and efficient water use will fuel long-term demand for the industry’s equipment. Initiatives to expand in the precision agriculture technology will be a game changer for the industry players.

Zacks Industry Rank Indicates Bright Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright prospects for the near term.

The Manufacturing Farm Equipment industry, which is part of the broader Industrial Products Sector, currently carries a Zacks Industry Rank #80, which places it at the Top 32% of 252 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.

Before we present a few Manufacturing – Farm Equipment stocks that can be retained in one’s portfolio, it’s worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Outperforms Sector & the S&P 500

The Manufacturing - Farm Equipment industry has outperformed the sector and the S&P 500 over the past year. Stocks in this industry have appreciated 9% compared with the Zacks Industrial Products sector’s growth of 1.5%, while the S&P 500 has gained 6.9%.

One-Year Price Performance

Manufacturing – Farm Equipment Industry 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 20.62X compared with the S&P 500’s 13.21X. The Industrial Products sector’s forward 12-month EV/EBITDA is 18.80X. 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 78.01X and as low as 11.94X, with the median being at 17.11X.

Bottom Line

The Manufacturing - Farm Equipment industry is currently under pressure due to the coronavirus pandemic, lower commodity prices and bleak demand. However, farm equipment demand will eventually pick up, spurred by the need to replace ageing equipment. Moreover, benefits from Precision Agriculture initiatives will be conducive over the long haul.

We are presenting one stock with a Zack Rank #1 (Strong Buy) and three 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 stocks here.

AGCO Corporation (AGCO - Free Report) : This Duluth, GA-based company sports a Zacks Rank #1, currently. The company has an estimated long-term earnings growth rate of 3.7%. It has an average earnings surprise of 41.7% for the preceding four quarters.

Price and Consensus: AGCO



Deere & Company (DE - Free Report) : This Moline, IL-based company carries a Zacks Rank #3, at present. It has a projected long-term earnings growth rate of 7%. The company has an average earnings surprise of 10.9% for the trailing four quarters.

Price and Consensus: DE



Kubota Corporation (KUBTY - Free Report) : This Osaka, Japan-based company currently carries a Zacks Rank of 3. It has an estimated long-term earnings growth rate of 4.6%.

Price and Consensus: KUBTY



Lindsay Corporation (LNN - Free Report) : This Omaha, NE-based company holds a Zacks Rank #3 at present. The Zacks Consensus Estimate for fiscal 2020 earnings indicates a year-over-year surge of 91%. It has an average earnings surprise of 24.4% for the last four quarters.

Price and Consensus: LNN



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