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 support the industry in the days ahead. The industry is focused on revolutionizing agriculture with technology in an effort to make farming automated, easy to use and more precise across the production process. Industry players like Deere & Company ( DE Quick Quote DE - Free Report) , AGCO Corporation ( AGCO Quick Quote AGCO - Free Report) , Lindsay Corporation ( LNN Quick Quote LNN - Free Report) and Titan International, Inc. ( TWI Quick Quote TWI - Free Report) are thus investing in advancement of farming technologies, which will aid growth in years to come. Industry Description
The Zacks Manufacturing - Farm Equipment industry comprises companies that manufacture agricultural equipment. These include tractors, combines, cotton pickers, harvesting equipment; tillage, seeding and application equipment, consisting of sprayers, nutrient management and soil preparation machinery; hay and forage equipment, comprising self-propelled forage harvesters and attachments, balers and mowers. 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. Some participants also manufacture irrigation equipment. The industry players 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
Per the United States Department of Agriculture’s (USDA) latest report, both corn and soybean production in 2021 are expected to be up from prior-year levels. Corn production is estimated at 14.8 billion bushels, while Soybean production will be around 4.34 billion bushels. Average corn yield is forecast at 174.6 bushels per acre and Soybean yields are expected to average 50.0 bushels per acre. Both are, however, lower than USDA’s July estimates, which led to an uptick in commodity prices. Corn and soybeans are the most important grains for cash crop farming in the United States. In the backdrop of strong demand and concerns about the drought conditions, prices are likely to go up further. On top of this, Brazil’s second corn crop has plunged to 10-year lows due to unfavorable weather. Brazil’s current second corn crop bridges the gap in global exports ahead of the U.S. harvest in September. This production decline from Brazil will further widen the gap between demand and supply and push up prices. High commodity prices and the consequent pickup in farm income will persuade farmers to continue spending on agricultural equipment. Apart from this, replacement requirement for old equipment will drive demand. Improving Commodity Prices: Customers are increasingly relying on advanced technology, smart farming solutions and mechanization to run their operations. The companies in the industry are, thus, enhancing investments in launching products equipped with advanced technologies and features in order to keep up with the evolving demands of customers. Initiatives to expand in the precision agriculture technology will be a game changer for industry players given its productivity-enhancing and sustainability benefits. Demand continues to grow for popular features, which automatically guide machines in the field and equipment that plants seeds and applies chemicals and fertilizers with exceptional accuracy. Over the long term, rising population, and elevated global demand for food and efficient water use will fuel demand for the industry’s equipment. Advancement in Latest Technology: The COVID-19 pandemic had affected U.S. agricultural exports and impacted commodity prices last year. Even though commodity prices have gained this year, the highly transmissible Delta variant might cut this rally short. Farmers will again adopt a cautious stance regarding their spending on equipment, which will hurt the top-line performance of the industry. The industry participants are currently facing raw material cost inflation, particularly of steel, as well as increased transportation costs. Constraints on availability of raw materials, labor and trucking resources have led to higher lead times for deliveries. This will hurt the industry’s margins. Delta Variant Poses a Threat: 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 #35, which places it at the top 14% 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. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. So far this year, the industry’s earnings estimates for the current year have been revised upward by 41%. 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 S&P 500 & Sector
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 89.6% compared with the Zacks Industrial Products sector and the S&P 500’s rally of 37% and 32.8%, respectively.
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 16.42X. The Industrial Products sector’s forward 12-month EV/EBITDA is 19.24X. 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 30.54X and as low as 13.35X, with the median being at 17.68X.
4 Manufacturing - Farm Equipment Stocks to Keep an Eye on
Deere: The company will continue to benefit from focus on launching products with advanced technologies and features that provide it a competitive edge. Efforts to expand in precision agriculture will be a significant growth driver. Deere, being the world’s largest producer of agricultural equipment and is poised well to benefit from the improving farm economy and the need to replace old equipment. It also makes construction equipment and will gain on strong demand in the residential and non-residential construction markets as well. Its cost control actions will drive margins. Backed by upbeat demand in its end-markets, its shares have surged 38% year to date. The Zacks Consensus Estimate for the Moline, IL-based company’s fiscal 2021 earnings has been revised upward by 2% over the past 60 days. It has a trailing four-quarter earnings surprise of 67.8%, on average. Deere has a long-term estimate earnings growth of 20%. It currently carries a Zacks Rank #2 (Buy). Price & Consensus: DE Lindsay Corporation: The company is witnessing improving order levels as higher commodity prices and rising farm income is fueling demand for irrigation equipment. Demand has been robust in international markets fueled by heightened concerns regarding food security due to the pandemic. A strong balance sheet, focus on introducing technologically advanced products, and investment in organic growth and acquisitions will drive growth. The infrastructure business is well-poised for growth, backed by strong demand for Road Zipper projects and transportation safety products and higher infrastructure spending. Backed by the ongoing order trends, shares of the Zacks #2 Ranked stock have rallied 28% so far this year. The Zacks Consensus Estimate for this Omaha, NE-based manufacturer of irrigation and road infrastructure products has moved north by by 16% over the past 60 days. The company has a trailing four-quarter earnings surprise of 11.9%, on average. Price & Consensus: LNN Titan International: Based-in Quincy, IL, the company is a leading global manufacturer of off-highway wheels, tires, assemblies and undercarriage products. Both of the company’s Agriculture and Earthmoving/Construction segments have been witnessing strong sales volume growth over the past two quarters. Farm commodity prices and the necessity to replace old equipment will continue to support improved order levels. The earthmoving and construction end-markets continue to look promising as the undercarriage business maintains a strong pace with increased infrastructure and ramping construction activities acting as key catalysts. Backed by this momentum, the company’s shares have surged 69% so far this year. The company’s continued cost reduction and cash preservation measures also positions it well for growth. The Zacks Consensus Estimate for the company’s current-year earnings has been revised upward by 175% over the past 60 days to 55 cents per share. The consensus mark suggests a year-over-year improvement of 155%. It has a trailing four-quarter earnings surprise of 36.3%, on average. It currently carries a Zacks Rank #2. Price & Consensus: TWI AGCO: This Duluth, GA based company is gaining on improved farm dynamics and increasing replacement demand for old equipment. AGCO continues to invest in products, premium technology and smart farming solutions to improve distribution and enhance digital capabilities in order to drive margins and strengthen product offerings. These efforts along with favorable market demand and its cost control efforts have aided margin expansion across all regions over the past few quarters. The stock has, thus, gained 30% so far this year. The Zacks Consensus Estimate for the company’s ongoing-year earnings has moved north by 10% over the past 60 days. This leading manufacturer and distributor of agricultural equipment and related replacement parts currently carries a Zacks Rank of 3 (Hold). It has a trailing four-quarter earnings surprise of 65%, on average. Price & Consensus: AGCO