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Farm Equipment Stocks Outlook: Near-Term Prospects Bleak

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The Zacks Manufacturing - Farm Equipment industry primarily includes companies which 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 manufacture 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. While some of the companies also provide   irrigation equipment.
 
The companies in the industry sell their equipment and related parts through independent retail dealer networks and retail outlets. The 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 is currently plagued with tariff and trade concerns. Tariffs imposed by Trump administration on steel and aluminum are hurting the manufacturers by inflating raw material costs. To aggravate things, China has retaliated with tariffs on U.S. agricultural exports, particularly soybeans, sorghum, and live hogs. Also, cost increases for fuel, chemical, fertilizer are weighing on the industry’s near-term prospects. 
     
  • The needs of the industry’s customers are now evolving, as they are now relying on advanced technology and mechanization to run their operations. Moreover, the companies in the industry are now growing their precision farming capabilities — the need of the hour. Notably, these advancements use predictive analytics to generate notifications and repair instructions to minimize machine downtime, coordinate machines to execute jobs more effectively and efficiently. Endeavors to grow in the precision agriculture technology will be a game changer for the players in the industry.
     
  • The Manufacturing - Farm Equipment industry has been witnessing a downtrend since 2013 owing to the impact of low commodity prices and sluggish farm incomes which impacted spending on farm equipment. Though net farm income improved 22.5% in 2017, per the United States Department of Agriculture’s (“USDA”), it is anticipated to decrease 13% year over year in 2018. However, farm equipment demand has recently picked up mainly driven by the need to replace the aging equipment. Moreover, the current tax reforms will encourage equipment purchases. Despite weak current agricultural conditions, long-term demand for the industry’s equipment will be fueled by increased global demand for food and efficient water use.
     

Zacks Industry Rank Indicates Dismal Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy prospects in the near term. The Manufacturing - Farm Equipment industry, which is part of the broader Industrial Products Sector, currently carries a Zacks Industry Rank #177, which places it at the bottom 31% of 256 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.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since the end of the second quarter, the industry’s earnings estimate for the current year has gone down 2%.
 
Our proprietary Heat Map shows that the industry’s rank has remained in the bottom half over the past seven weeks
 
 
Despite the bleak near-term prospects of the industry, we will present a few farm equipment stocks that one can hold on to given their growth prospects. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
 
Industry Outperforms S&P 500 and Sector on Shareholder Returns 
 
The Manufacturing - Farm Equipment industry has outperformed the S&P 500 as well as its own sector over the past year. While the stocks in this industry have collectively gained 9.4%, the Zacks S&P 500 rose 8.6%. Meanwhile, the Zacks Industrial Products Sector declined 7.6%.
 
One-Year Price Performance
 
 
Industry Valuation
 
EV/EBITDA ratio is commonly used for valuing farm equipment stocks. The industry currently has a trailing 12-month EV/EBITDA ratio of 10.0, in-line with its five-year median. The trailing 12-month EV/EBITDA ratio for the S&P 500 is 11.3 and the median level is 9.9.
 
EV/EBITDA Ratio (TTM)
 
 
The Zacks Industrial Products Sector’s trailing 12-month EV/EBITDA ratio is 13.3 and five-year median level is 13.7.
 
EV/EBITDA Ratio (TTM)
 
 
Bottom Line
 
The Manufacturing - Farm Equipment industry is currently reeling under the pressure of tariffs. Moreover, lower projections of farm incomes along with rising interest rates add to the woes. However, price hikes and prudent cost management will help sustain margins. Also, USDA has declared to provide up to $12 billion relief package to U.S. farmers to protect them from the impact of trade disputes. 
 
Farm equipment demand is picking up, albeit at a slow pace, as farmers replace equipment after a stretch of tepid demand in North America due to declining farm income since 2015. So, until there is a meaningful improvement in commodity prices that can bolster farm income, replacement demand will fuel its results. Also, benefits from Precision Agriculture initiatives will help over the long haul.
 
Below we have discussed four stocks that investors may want to hold on to for the time being. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
 
Deere & Company (DE - Free Report) : This Moline, IL-based company has a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for earnings for fiscal 2018 indicates year-over-year growth of 42%. The company has an estimated long-term earnings growth rate of 5.7%. The company has delivered an average positive earnings surprise of 2.06% in the trailing four quarters. 
 
Price and Consensus: DE
 
 
AGCO Corporation (AGCO - Free Report) : This Duluth, GA-based company is a Zacks Ranked #3 stock. The Zacks Consensus Earnings Estimate for fiscal 2018 indicates year-over-year growth of 25%. The company has an estimated long-term earnings growth rate of 16.7%. The company has delivered an average positive earnings surprise of 57.53% in the trailing four quarters. 
 
Price and Consensus: AGCO
 
 
Briggs & Stratton Corporation (BGG - Free Report) : This Wauwatosa, WI-based company carries a Zacks Rank #3. The Zacks Consensus Earnings Estimate for fiscal 2018 indicates year-over-year growth of 12%. The company has delivered an average positive earnings surprise of 11.17% over the trailing four quarters. 
 
Price and Consensus: BGG
 
 
Titan International, Inc. (TWI - Free Report) : This Quincy, IL-based company is another Zacks Rank #3 stock. The Zacks Consensus Earnings Estimate for fiscal 2018 indicates year-over-year growth of 147%. The company has delivered an average positive earnings surprise of 108.27% over the trailing four quarters.
 
Price and Consensus: TWI
 
 
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