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The Zacks Manufacturing - Farm Equipment industry will benefit from upbeat commodity prices, which in turn will boost farm income and lead to higher spending on agricultural equipment. However, coronavirus-induced volatilities, supply chain disruptions and inflationary costs remain near-term concerns. The industry remains focused on revolutionizing agriculture with technology to make farming automated, easy to use and more precise across the production process. Players like Deere & Company (DE - Free Report) , Kubota Corporation (KUBTY - Free Report) , AGCO Corporation (AGCO - Free Report) and Titan International, Inc. are well-poised to gain on their investment in technologies, strong demand and cost control efforts.
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, consisting of self-propelled forage harvesters and attachments, balers and mowers. Some of these companies 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
Coronavirus, High Costs & Supply Chain Issues Ail: 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 emergence of different variants, the most recent being Omicron might cut this rally short. Farmers will again adopt a cautious stance regarding their spending on equipment, which will hurt the industry’s top-line performance. The industry participants are currently facing raw material cost inflation, particularly of steel, as well as increased transportation costs. Constraints on the availability of raw materials, labor and trucking resources have led to higher lead times for deliveries. Shortage of labor might also impact their production levels and impair their ability to meet demand. The industry players are thus making every effort to bolster their financial condition, conserve cash and improve profitability. The companies have been implementing cost-reduction actions, which are likely to help sustain margins in this scenario.
Improving Commodity Prices: Corn and soybeans are the most important grains for cash crop farming in the United States. Corn prices have gained 23% this year. It is currently at $6 a bushel, amid production concerns owing to dry weather in South America, elevated global fertilizer prices and solid demand from South Korea, which is a major buyer. Demand for ethanol, which is a corn-based fuel, and fears of supply disruptions due to renewed lockdowns will support prices. In China, corn usage is anticipated to rise as local wheat prices are trending higher than corn, making wheat expensive to replace corn in animal feed. Soybean is at $13.5 per bushel, gaining 4% over the year. Supply worries stemming from drought conditions in South American growing belts and the southern state of Rio Grande do Sul in Brazil due to La Nina will support prices. Owing to high fertilizer prices, farmers are opting for soybean as it is a less fertilizer-intensive crop. Chinese soybean imports have been down amid a sharp fall in hog sector profitability and growing usage of wheat for animal feed. However, with higher local wheat prices, demand for soybean in China is likely to go up. High commodity prices will drive farm income and persuade farmers to continue spending on agricultural equipment. Apart from this, the need to replace ageing equipment will sustain demand.
Advancement in Latest Technology: Customers are increasingly relying on advanced technology, smart farming solutions and mechanization to run their operations. Thus, the companies in the industry are 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 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 include automatic 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.
Zacks Industry Rank Indicates Weak Prospects
The Zacks Manufacturing - Farm Equipment industry is part of the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #178, which places it at the bottom 30% 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 dim 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.
The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic on this group’s earnings growth potential. Over the past three months, the industry’s earnings estimates for the current year have dipped 1%.
Despite the bleak near-term prospects of the industry, we will 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 Lags S&P 500 But Outperforms Sector
The Zacks Manufacturing - Farm Equipment industry has outperformed its own sector but lagged the Zacks S&P 500 composite over the past 12 months. Stocks in this industry have gained 23.6% compared with the Zacks Industrial Products sector rally of 14%. The S&P 500 has risen 28.6% in the said time frame.
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 11.54X compared with the S&P 500’s 14.78X. The Industrial Products sector’s forward 12-month EV/EBITDA is 18.07X. 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 24.75X and as low as 10.43X, with the median being at 16.12X.
4 Manufacturing - Farm Equipment Stocks to Keep an Eye on
Titan International: The company’s third-quarter 2021 was its strongest third quarter for revenues and profitability since 2013. Both of the company’s Agriculture and Earthmoving/Construction segments have been witnessing strong sales volume growth over the past few quarters. Farm commodity prices and the necessity to replace old equipment will continue to support improved order levels for the agricultural segment. 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 soared 127% this year. The company’s continued cost reduction and cash preservation measures position it well for growth.
The Zacks Consensus Estimate for the company’s earnings for fiscal 2022 has been revised upward by 5% over the past 60 days to 83 cents per share. The consensus mark suggests a year-over-year improvement of 31%. It has a trailing four-quarter earnings surprise of 32%, on average. Based-in Quincy, IL, Titan International is a leading global manufacturer of off-highway wheels, tires, assemblies and undercarriage products. TWI currently carries a Zacks Rank #2 (Buy).
Deere: The company will continue to benefit from the 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 well-poised to benefit from the improving agricultural commodity prices. Replacement demand triggered by the need to upgrade old equipment will continue to support its revenues. It 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 27% in a year.
The Zacks Consensus Estimate for the Moline, IL-based company’s fiscal 2022 earnings is currently pegged at $22.18. The estimate indicates year-over-year growth of around 17%. It has a trailing four-quarter earnings surprise of 33.6%, on average. Deere has an estimated long-term earnings growth rate of 11.2%. DE currently carries a Zacks Rank #3 (Hold).
Price & Consensus: DE
AGCO: The company has been gaining on improved farm dynamics and increasing replacement demand for old equipment. AGCO continues to invest in products, precision farming 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 gained 11% in a year’s time.
The Zacks Consensus Estimate for the company’s fiscal 2022 earnings currently stands at $10.39. This Duluth, GA-based leading manufacturer and distributor of agricultural equipment and related replacement parts currently carries a Zacks Rank of 3. AGCO has a trailing four-quarter earnings surprise of 47.5%, on average. The company has an estimated long-term earnings growth rate of 19%.
Price & Consensus: AGCO
Kubota: The company will continue to benefit from strong demand for agriculture due to improving commodity prices. Strong demand from construction sectors will support demand for its construction machinery worldwide. Its shares have gained 1% in the past year. Kubota has formulated its long-term vision “GMB2030” and has been progressing with initiatives to realize smart agriculture with the aim of providing solutions that will improve the productivity and safety of food. Agricultural machine automation is one of the key pillars of these initiatives. To this end, the company recently acquired AgJunction to strengthen its development structure for technologies related to automation and autonomy, connectivity, and data. The company recently invested in Bloomfield Robotics, Inc, a U.S. startup company that uses image analysis technology and artificial intelligence to assess plant growth and detect pests on grape, blueberry, and other tree crops.
Osaka, Japan-based Kubota manufactures and markets machinery and related solutions in the food, water, and environment markets in Japan, North America, Europe, the rest of Asia, and internationally. The Zacks Consensus Estimate for the company’s earnings for fiscal 2022 is currently pegged at $7.48, suggesting year-over-year growth of 9%. The estimate has gone up 7% in the past 60 days. The company has a trailing four-quarter earnings surprise of 20.6%, on average. The company has an estimated long-term earnings growth rate of 15.8% and a Zacks Rank #3.
Price & Consensus: KUBTY
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4 Farm Equipment Stocks to Watch Amid Cost & Supply Chain Woes
The Zacks Manufacturing - Farm Equipment industry will benefit from upbeat commodity prices, which in turn will boost farm income and lead to higher spending on agricultural equipment. However, coronavirus-induced volatilities, supply chain disruptions and inflationary costs remain near-term concerns. The industry remains focused on revolutionizing agriculture with technology to make farming automated, easy to use and more precise across the production process. Players like Deere & Company (DE - Free Report) , Kubota Corporation (KUBTY - Free Report) , AGCO Corporation (AGCO - Free Report) and Titan International, Inc. are well-poised to gain on their investment in technologies, strong demand and cost control efforts.
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, consisting of self-propelled forage harvesters and attachments, balers and mowers. Some of these companies 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
Coronavirus, High Costs & Supply Chain Issues Ail: 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 emergence of different variants, the most recent being Omicron might cut this rally short. Farmers will again adopt a cautious stance regarding their spending on equipment, which will hurt the industry’s top-line performance. The industry participants are currently facing raw material cost inflation, particularly of steel, as well as increased transportation costs. Constraints on the availability of raw materials, labor and trucking resources have led to higher lead times for deliveries. Shortage of labor might also impact their production levels and impair their ability to meet demand. The industry players are thus making every effort to bolster their financial condition, conserve cash and improve profitability. The companies have been implementing cost-reduction actions, which are likely to help sustain margins in this scenario.
Improving Commodity Prices: Corn and soybeans are the most important grains for cash crop farming in the United States. Corn prices have gained 23% this year. It is currently at $6 a bushel, amid production concerns owing to dry weather in South America, elevated global fertilizer prices and solid demand from South Korea, which is a major buyer. Demand for ethanol, which is a corn-based fuel, and fears of supply disruptions due to renewed lockdowns will support prices. In China, corn usage is anticipated to rise as local wheat prices are trending higher than corn, making wheat expensive to replace corn in animal feed. Soybean is at $13.5 per bushel, gaining 4% over the year. Supply worries stemming from drought conditions in South American growing belts and the southern state of Rio Grande do Sul in Brazil due to La Nina will support prices. Owing to high fertilizer prices, farmers are opting for soybean as it is a less fertilizer-intensive crop. Chinese soybean imports have been down amid a sharp fall in hog sector profitability and growing usage of wheat for animal feed. However, with higher local wheat prices, demand for soybean in China is likely to go up. High commodity prices will drive farm income and persuade farmers to continue spending on agricultural equipment. Apart from this, the need to replace ageing equipment will sustain demand.
Advancement in Latest Technology: Customers are increasingly relying on advanced technology, smart farming solutions and mechanization to run their operations. Thus, the companies in the industry are 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 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 include automatic 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.
Zacks Industry Rank Indicates Weak Prospects
The Zacks Manufacturing - Farm Equipment industry is part of the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #178, which places it at the bottom 30% 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 dim 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.
The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic on this group’s earnings growth potential. Over the past three months, the industry’s earnings estimates for the current year have dipped 1%.
Despite the bleak near-term prospects of the industry, we will 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 Lags S&P 500 But Outperforms Sector
The Zacks Manufacturing - Farm Equipment industry has outperformed its own sector but lagged the Zacks S&P 500 composite over the past 12 months. Stocks in this industry have gained 23.6% compared with the Zacks Industrial Products sector rally of 14%. The S&P 500 has risen 28.6% in the said time frame.
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 11.54X compared with the S&P 500’s 14.78X. The Industrial Products sector’s forward 12-month EV/EBITDA is 18.07X. 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 24.75X and as low as 10.43X, with the median being at 16.12X.
4 Manufacturing - Farm Equipment Stocks to Keep an Eye on
Titan International: The company’s third-quarter 2021 was its strongest third quarter for revenues and profitability since 2013. Both of the company’s Agriculture and Earthmoving/Construction segments have been witnessing strong sales volume growth over the past few quarters. Farm commodity prices and the necessity to replace old equipment will continue to support improved order levels for the agricultural segment. 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 soared 127% this year. The company’s continued cost reduction and cash preservation measures position it well for growth.
The Zacks Consensus Estimate for the company’s earnings for fiscal 2022 has been revised upward by 5% over the past 60 days to 83 cents per share. The consensus mark suggests a year-over-year improvement of 31%. It has a trailing four-quarter earnings surprise of 32%, on average. Based-in Quincy, IL, Titan International is a leading global manufacturer of off-highway wheels, tires, assemblies and undercarriage products. TWI currently carries a Zacks Rank #2 (Buy).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price & Consensus: TWI
Deere: The company will continue to benefit from the 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 well-poised to benefit from the improving agricultural commodity prices. Replacement demand triggered by the need to upgrade old equipment will continue to support its revenues. It 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 27% in a year.
The Zacks Consensus Estimate for the Moline, IL-based company’s fiscal 2022 earnings is currently pegged at $22.18. The estimate indicates year-over-year growth of around 17%. It has a trailing four-quarter earnings surprise of 33.6%, on average. Deere has an estimated long-term earnings growth rate of 11.2%. DE currently carries a Zacks Rank #3 (Hold).
Price & Consensus: DE
AGCO: The company has been gaining on improved farm dynamics and increasing replacement demand for old equipment. AGCO continues to invest in products, precision farming 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 gained 11% in a year’s time.
The Zacks Consensus Estimate for the company’s fiscal 2022 earnings currently stands at $10.39. This Duluth, GA-based leading manufacturer and distributor of agricultural equipment and related replacement parts currently carries a Zacks Rank of 3. AGCO has a trailing four-quarter earnings surprise of 47.5%, on average. The company has an estimated long-term earnings growth rate of 19%.
Price & Consensus: AGCO
Kubota: The company will continue to benefit from strong demand for agriculture due to improving commodity prices. Strong demand from construction sectors will support demand for its construction machinery worldwide. Its shares have gained 1% in the past year. Kubota has formulated its long-term vision “GMB2030” and has been progressing with initiatives to realize smart agriculture with the aim of providing solutions that will improve the productivity and safety of food. Agricultural machine automation is one of the key pillars of these initiatives. To this end, the company recently acquired AgJunction to strengthen its development structure for technologies related to automation and autonomy, connectivity, and data. The company recently invested in Bloomfield Robotics, Inc, a U.S. startup company that uses image analysis technology and artificial intelligence to assess plant growth and detect pests on grape, blueberry, and other tree crops.
Osaka, Japan-based Kubota manufactures and markets machinery and related solutions in the food, water, and environment markets in Japan, North America, Europe, the rest of Asia, and internationally. The Zacks Consensus Estimate for the company’s earnings for fiscal 2022 is currently pegged at $7.48, suggesting year-over-year growth of 9%. The estimate has gone up 7% in the past 60 days. The company has a trailing four-quarter earnings surprise of 20.6%, on average. The company has an estimated long-term earnings growth rate of 15.8% and a Zacks Rank #3.
Price & Consensus: KUBTY
