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4 Top Stocks to Watch From the Flourishing Farm Equipment Industry
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The Zacks Manufacturing - Farm Equipment industry is poised to grow on improving farm income and rebound in commodity prices. This will make farmers resume spending on agricultural equipment that will support the industry in the days to come. The industry is also well positioned to benefit from investments in farming technologies and smart farming solutions.
Deere & Company (DE - Free Report) , AGCO Corporation (AGCO - Free Report) , Alamo Group Inc. (ALG - Free Report) and Lindsay Corporation (LNN - Free Report) are some stocks which are likely to benefit from these trends. However, concerns over the U.S-China trade tariffs, coupled with uncertainty regarding the pandemic, are headwinds for the industry.
Industry Description
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.
What’s Shaping the Future of the Manufacturing - Farm Equipment Industry?
Improving Farm Prospects: Anticipations of improving farm dynamics bode well for the industry. Per the latest U.S Department of Agriculture (USDA)’s report, net farm income is estimated to jump 43.1% to $119.6 billion in 2020. In inflation-adjusted terms, the projected net farm income in 2020, if realized, would mark the highest level since 2013 and 32% higher than the 2000-19 average ($90.6 billion). This upswing is primarily driven by higher Federal government direct farm program payments through the expansion of the Coronavirus Food Assistance Program ("CFAP”), which was designed to provide direct assistance to farmers affected by market disruptions due to the pandemic earlier this year. Farmers also had to bear the brunt of lower agricultural commodity prices due to the pandemic. However, commodity prices have shown a recovery in recent months on an improving demand environment. Global crop production is also set for another record year. Therefore, pickup in commodity prices, improving farm income will encourage farmers to resume spending on agricultural equipment. Replacement demand for age old equipment will also keep spurring farm equipment demand in the near term. Moreover, favorable material costs and cost-reduction initiatives will help sustain margins.
Advancement in Farming Technologies: With customers increasingly relying on advanced technology, smart farming solutions 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. Initiatives to expand in the precision agriculture technology will be a game changer for industry players. Over the long term, elevated global demand for food and efficient water use will fuel demand for the industry’s equipment.
Pandemic-induced Uncertainty Prevails: The pandemic has dealt a severe blow to U.S. agricultural exports, which had already been reeling under the trade spat with China. Per the U.S-China Phase one trade deal, China had pledged to increase purchases of agricultural products by $32 billion over a period of two years. Though exports to China have increased year to date, it still remains below the commitment level. Hence, it is to be seen whether or not China will be able to honor its terms of the agreement. Furthermore, resurgence in coronavirus cases is a major concern as it might impact commodity prices again. Farmers will likely adopt a cautious stance regarding their spending on equipment.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Manufacturing - Farm Equipment industry is part of the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #8, which places it at the top 3% of the 254 Zacks industries.
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. 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 Manufacturing - Farm Equipment stocks that can be retained in one’s portfolio, it’s worth taking a look at the industry’s stock-market performance and valuation picture.
Industry Outperforms Sector & the S&P 500
The Zacks Manufacturing - Farm Equipment industry has outperformed the sector and the S&P 500 over the past year. Stocks in this industry have appreciated 52.4% compared with the Zacks Industrial Products sector’s growth of 18.5%, while the S&P 500 has gained 18.1%.
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 16.28X compared with the S&P 500’s 15.04X. The Industrial Products sector’s forward 12-month EV/EBITDA is 16.28X. 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 124.82X and as low as 12.32X, with the median being at 17.56X.
4 Manufacturing - Farm Equipment Stocks to Keep a Close Eye On
Deere: Based in Moline, IL, Deere is the world’s largest producer of agricultural equipment. The company expects to benefit from the improving farm economy and effort to reduce operating expenses. Deere is making investments in new products and technologies in an effort to make farming automated, easy to use and more precise across the production process. This will bolster the company’s revenues in the near term. Deere’s efforts to expand in precision agriculture also bode well.
The Zacks Consensus Estimate for the company’s fiscal 2021 earnings has been revised upward by 25.2% over the past 60 days to $12.64. The estimate also suggests year-over-year growth of 45.4%. The company’s shares have gained 51.5% over the past six months. It has a trailing four-quarter average earnings surprise of 52.5% and currently flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: DE
AGCO: Based in Duluth, GA, AGCO is a leading manufacturer and distributor of agricultural equipment and related replacement parts. The company is well placed to gain from improved farm income, stabilization of U.S farm sector and increasing replacement demand. AGCO continues to invest in products, premium technology and smart farming solutions in a bid to strengthen product offerings. Moreover, positive pricing, favorable material costs and cost-control initiatives will likely drive margins.
The Zacks Consensus Estimate for the company’s current-year earnings is currently pegged at $5.13, highlighting a year-over-year increase of 15.5%. The consensus mark has moved 31.5% north over the past 60 days. The stock has rallied 47.6% in the past six months. The company currently sports a Zacks Rank #1 and has a trailing four-quarter earnings surprise of 434.4%, on average.
Price & Consensus: AGCO
Alamo Group: Based in Seguin, TX the company is a leader in the designing and manufacturing of high quality agricultural equipment and infrastructure maintenance equipment for governmental and industrial use. Alamo is poised to benefit from the stabilization in the agricultural sector and increased backlog levels. Contributions from the Morbark and Dutch Power acquisitions will also drive Alamo’s revenue performance. In addition, management has implemented several cost-containment actions to boost its liquidity and cash flow in response to the coronavirus mayhem.
The Zacks Consensus Estimate for the company’s ongoing-year earnings has been revised 7.7% upward in 60 days’ time to $5.54. The stock has appreciated 17.6% in six months’ time. It currently carries a Zacks Rank #2 (Buy) and has a trailing four-quarter average earnings surprise of 7.1%.
Price & Consensus: ALG
Lindsay: Based in Omaha, NE, Lindsay provides a variety of proprietary water management, and road infrastructure products and services. The company is benefiting from its Foundation for Growth initiative, which will likely drive its margins and bottom-line results in the days ahead. The company’s infrastructure business is poised to grow on the Highways England project as well as contribution from Road Zipper Systems. Apart from this, improving farm income and increase in commodity prices will fuel Lindsay’s top-line growth.
The Zacks Consensus Estimate for the company’s fiscal 2021 earnings has moved 11.7% upward over the past 60 days to $3.14 per share. The company has a trailing four-quarter average earnings surprise of 16.8%. This Zacks Ranked #2 stock has rallied 13.4% over the past six months.
Price & Consensus: LNN
5 Stocks Set to Double
Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.
Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
Image: Bigstock
4 Top Stocks to Watch From the Flourishing Farm Equipment Industry
The Zacks Manufacturing - Farm Equipment industry is poised to grow on improving farm income and rebound in commodity prices. This will make farmers resume spending on agricultural equipment that will support the industry in the days to come. The industry is also well positioned to benefit from investments in farming technologies and smart farming solutions.
Deere & Company (DE - Free Report) , AGCO Corporation (AGCO - Free Report) , Alamo Group Inc. (ALG - Free Report) and Lindsay Corporation (LNN - Free Report) are some stocks which are likely to benefit from these trends. However, concerns over the U.S-China trade tariffs, coupled with uncertainty regarding the pandemic, are headwinds for the industry.
Industry Description
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.
What’s Shaping the Future of the Manufacturing - Farm Equipment Industry?
Improving Farm Prospects: Anticipations of improving farm dynamics bode well for the industry. Per the latest U.S Department of Agriculture (USDA)’s report, net farm income is estimated to jump 43.1% to $119.6 billion in 2020. In inflation-adjusted terms, the projected net farm income in 2020, if realized, would mark the highest level since 2013 and 32% higher than the 2000-19 average ($90.6 billion). This upswing is primarily driven by higher Federal government direct farm program payments through the expansion of the Coronavirus Food Assistance Program ("CFAP”), which was designed to provide direct assistance to farmers affected by market disruptions due to the pandemic earlier this year. Farmers also had to bear the brunt of lower agricultural commodity prices due to the pandemic. However, commodity prices have shown a recovery in recent months on an improving demand environment. Global crop production is also set for another record year. Therefore, pickup in commodity prices, improving farm income will encourage farmers to resume spending on agricultural equipment. Replacement demand for age old equipment will also keep spurring farm equipment demand in the near term. Moreover, favorable material costs and cost-reduction initiatives will help sustain margins.
Advancement in Farming Technologies: With customers increasingly relying on advanced technology, smart farming solutions 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. Initiatives to expand in the precision agriculture technology will be a game changer for industry players. Over the long term, elevated global demand for food and efficient water use will fuel demand for the industry’s equipment.
Pandemic-induced Uncertainty Prevails: The pandemic has dealt a severe blow to U.S. agricultural exports, which had already been reeling under the trade spat with China. Per the U.S-China Phase one trade deal, China had pledged to increase purchases of agricultural products by $32 billion over a period of two years. Though exports to China have increased year to date, it still remains below the commitment level. Hence, it is to be seen whether or not China will be able to honor its terms of the agreement. Furthermore, resurgence in coronavirus cases is a major concern as it might impact commodity prices again. Farmers will likely adopt a cautious stance regarding their spending on equipment.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Manufacturing - Farm Equipment industry is part of the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #8, which places it at the top 3% of the 254 Zacks industries.
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. 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 Manufacturing - Farm Equipment stocks that can be retained in one’s portfolio, it’s worth taking a look at the industry’s stock-market performance and valuation picture.
Industry Outperforms Sector & the S&P 500
The Zacks Manufacturing - Farm Equipment industry has outperformed the sector and the S&P 500 over the past year. Stocks in this industry have appreciated 52.4% compared with the Zacks Industrial Products sector’s growth of 18.5%, while the S&P 500 has gained 18.1%.
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 16.28X compared with the S&P 500’s 15.04X. The Industrial Products sector’s forward 12-month EV/EBITDA is 16.28X. 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 124.82X and as low as 12.32X, with the median being at 17.56X.
4 Manufacturing - Farm Equipment Stocks to Keep a Close Eye On
Deere: Based in Moline, IL, Deere is the world’s largest producer of agricultural equipment. The company expects to benefit from the improving farm economy and effort to reduce operating expenses. Deere is making investments in new products and technologies in an effort to make farming automated, easy to use and more precise across the production process. This will bolster the company’s revenues in the near term. Deere’s efforts to expand in precision agriculture also bode well.
The Zacks Consensus Estimate for the company’s fiscal 2021 earnings has been revised upward by 25.2% over the past 60 days to $12.64. The estimate also suggests year-over-year growth of 45.4%. The company’s shares have gained 51.5% over the past six months. It has a trailing four-quarter average earnings surprise of 52.5% and currently flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: DE
AGCO: Based in Duluth, GA, AGCO is a leading manufacturer and distributor of agricultural equipment and related replacement parts. The company is well placed to gain from improved farm income, stabilization of U.S farm sector and increasing replacement demand. AGCO continues to invest in products, premium technology and smart farming solutions in a bid to strengthen product offerings. Moreover, positive pricing, favorable material costs and cost-control initiatives will likely drive margins.
The Zacks Consensus Estimate for the company’s current-year earnings is currently pegged at $5.13, highlighting a year-over-year increase of 15.5%. The consensus mark has moved 31.5% north over the past 60 days. The stock has rallied 47.6% in the past six months. The company currently sports a Zacks Rank #1 and has a trailing four-quarter earnings surprise of 434.4%, on average.
Price & Consensus: AGCO
Alamo Group: Based in Seguin, TX the company is a leader in the designing and manufacturing of high quality agricultural equipment and infrastructure maintenance equipment for governmental and industrial use. Alamo is poised to benefit from the stabilization in the agricultural sector and increased backlog levels. Contributions from the Morbark and Dutch Power acquisitions will also drive Alamo’s revenue performance. In addition, management has implemented several cost-containment actions to boost its liquidity and cash flow in response to the coronavirus mayhem.
The Zacks Consensus Estimate for the company’s ongoing-year earnings has been revised 7.7% upward in 60 days’ time to $5.54. The stock has appreciated 17.6% in six months’ time. It currently carries a Zacks Rank #2 (Buy) and has a trailing four-quarter average earnings surprise of 7.1%.
Price & Consensus: ALG
Lindsay: Based in Omaha, NE, Lindsay provides a variety of proprietary water management, and road infrastructure products and services. The company is benefiting from its Foundation for Growth initiative, which will likely drive its margins and bottom-line results in the days ahead. The company’s infrastructure business is poised to grow on the Highways England project as well as contribution from Road Zipper Systems. Apart from this, improving farm income and increase in commodity prices will fuel Lindsay’s top-line growth.
The Zacks Consensus Estimate for the company’s fiscal 2021 earnings has moved 11.7% upward over the past 60 days to $3.14 per share. The company has a trailing four-quarter average earnings surprise of 16.8%. This Zacks Ranked #2 stock has rallied 13.4% over the past six months.
Price & Consensus: LNN
5 Stocks Set to Double
Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.
Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
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