Back to top

Image: Shutterstock

4 Top Stocks to Watch in a Prospering Farm Equipment Industry

Read MoreHide Full Article

The Zacks Manufacturing - Farm Equipment industry is benefiting from the upbeat commodity prices. This will help improve farm income and persuade farmers to spend on agricultural equipment that will fortify the industry in the days to come. The industry is well placed to gain from investments in advancement of farming technologies and smart farming solutions.

Deere & Company (DE - Free Report) , AGCO Corporation (AGCO - Free Report) , Lindsay Corporation (LNN - Free Report) and Titan International (TWI - Free Report) are a few stocks which will benefit from these trends. However, uncertainty regarding the pandemic remains a concern 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.

 

Trends Shaping the Future of the Manufacturing - Farm Equipment Industry

 

Improving Commodity Prices: After declining significantly in the earlier part of 2020 thanks to the pandemic, global commodity prices have since regained ground on an improving demand environment, strong export demand and rising farm income. Last year, the Federal government announced direct farm program payments through the Coronavirus Food Assistance Program ("CFAP”) in a bid to provide direct assistance to farmers affected by pandemic related disruptions. This led to a surge in farm income by 44.2% in 2020 — the highest level since 2013. Even though the USDA (U.S Department of Agriculture) projects net farm income to decline 8.1% to $111.4 billion in 2021 due to lower direct Government farm payments, it would still be 21% higher than the 2000-19 average of $92.1 billion. Strong planting season and supply constraints will continue to support commodity prices and net farm income this year, encouraging farmers to invest in farm equipment. Apart from this, replacement demand for age-old equipment will also keep spurring demand.

Advancement in Agricultural 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 investments in precision farming and capabilities, in order to keep up with the evolving demands for agricultural equipment. Investment in new products and geographies as well as initiatives to expand in the precision agriculture technology will be a game changer for industry players. Over the long term, rising population, and elevated global demand for food and efficient water use will fuel demand for the industry’s equipment.

Pandemic-induced Uncertainty Prevails: The COVID-19 pandemic has affected U.S. agricultural exports, which had already been reeling under the unfavorable impact of the U.S.-China trade spat. Per the U.S-China Phase one trade deal, China had pledged to increase purchases of U.S agricultural products by $32 billion over a period of two years. Though exports to China have not been significantly impacted since the onset of the pandemic, it 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, the resurgence of COVID-19 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 #30, which places it at the top 12% 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 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 surged 167.8% compared with the Zacks Industrial Products sector’s rally of 106.7%, while the S&P 500 has gained 46.3%.

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 23.59X compared with the S&P 500’s 17.21X. The Industrial Products sector’s forward 12-month EV/EBITDA is 23.59X. 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 31.77X and as low as 13.35X, with the median being at 17.99X.

 

4 Manufacturing - Farm Equipment Stocks Moving Ahead of the Pack

 

Deere: Based in Moline, IL, Deere is the world’s largest producer of agricultural equipment. The company is poised well to benefit from the improving farm economy. Efforts to reduce operating expenses will drive margins. 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. Its focus to expand in precision agriculture also bode well.

The Zacks Consensus Estimate for the company’s fiscal 2021 earnings has been revised upward by 21.4% over the past 60 days to $15.96. The estimate also suggests year-over-year growth of 83.7%. The company’s shares have gained 60.5% over the past six months. It has a trailing four-quarter average earnings surprise of 65.7% 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



Titan International: Based-in Quincy, IL, the company is a leading global manufacturer of off-highway wheels, tires, assemblies and undercarriage products. The company is gaining from the rising soybean prices due to supply constraints in its top producer Brazil and dry weather conditions. Corn prices are also improving on solid demand in China. Improving agricultural fundamentals will reflect on Titan International’s top-line results. The company will also benefit from the implementation of cost-reduction actions in response to material-cost inflation.

The Zacks Consensus Estimate for the company’s current-year earnings has been revised upward by a whopping 200% over the past 60 days to 6 cents per share. The estimate also suggests a year-over-year surge of 106%. The company’s shares have surged 241.2% over the past six months. It has a trailing four-quarter average earnings surprise of 32.2% and currently carries a Zacks Rank #2 (Buy).

Price & Consensus: TWI



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 dynamics and increasing replacement demand for age old equipment. AGCO continues to invest in innovative 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 ongoing-year earnings is currently pegged at $7.31, suggesting a year-over-year increase of 30.3%. The consensus mark has moved 0.3% north over the past 60 days. The stock has rallied 85.7% in the past six months. The company currently carries a Zacks Rank of 3 and has a trailing four-quarter earnings surprise of 454.9%, on average.

Price & Consensus: AGCO



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 boost the bottom line 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 2% upward over the past 60 days to $3.59 per share. The estimate calls for year-over-year growth of 1%. The company has a trailing four-quarter average earnings surprise of 8%. This Zacks #3 Ranked stock has rallied 55.4% over the past six months.  


Price & Consensus: LNN



Infrastructure Stock Boom to Sweep America

A massive push to rebuild the crumbling U.S. infrastructure will soon be underway. It’s bipartisan, urgent, and inevitable. Trillions will be spent. Fortunes will be made.

The only question is “Will you get into the right stocks early when their growth potential is greatest?”

Zacks has released a Special Report to help you do just that, and today it’s free. Discover 7 special companies that look to gain the most from construction and repair to roads, bridges, and buildings, plus cargo hauling and energy transformation on an almost unimaginable scale.

Download FREE: How to Profit from Trillions on Spending for Infrastructure >>