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4 Farm Equipment Stocks to Watch Amid Industry Challenges
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Despite weak commodity prices and high costs marring the near-term outlook of the Zacks Manufacturing - Farm Equipment industry, it will gain from sustained demand for agricultural equipment required to feed a growing population.
Major players like Deere (DE - Free Report) , Kubota (KUBTY - Free Report) , Alamo Group (ALG - Free Report) and Lindsay (LNN - Free Report) are well-poised to benefit from this demand by expanding their product offerings. The industry’s emphasis on revolutionizing agriculture with technology to make farming automated and more precise is expected to be a major catalyst. Deere, CNH Industrial (CNHI - Free Report) and others are thus actively investing in upping their technology game.
About the Industry
The Zacks Manufacturing - Farm Equipment industry comprises companies that manufacture agricultural equipment. These equipment include tractors, combines, cotton pickers and harvesting equipment; tillage, seeding and application equipment, consisting of sprayers, nutrient management and soil preparation machinery; and hay and forage equipment, comprising self-propelled forage harvesters and attachments, balers and mowers. Some of the companies in the industry also produce turf and utility equipment, consisting of riding lawn equipment and walk-behind mowers, golf course equipment, utility vehicles, commercial mowing equipment, and garden tillers and snow throwers. Some participants manufacture irrigation equipment. Deere, CNH Industrial and AGCO presently hold the positions as the top three global manufacturers of agricultural equipment (in that order).
Trends Shaping the Future of the Manufacturing - Farm Equipment Industry
Low Commodity Prices Act as a Woe: High interest rates and a strong dollar took a toll on agricultural commodity prices last year. Soybean, corn and wheat prices have dipped lately as supply prospects from South America have improved due to favorable weather conditions in the backdrop of low demand. Demand in China for soybeans as animal feed is expected to go down due to the government’s efforts to reduce and substitute the use of soybeans in animal feed to decrease reliance on imports. Chicago corn futures have dropped to $4.40 per bushel at three-year lows. Wheat futures have fallen below $6 per bushel. Low commodity prices will weigh on farm income and might influence the investment decision-making for farmers.
High Costs & Supply-Chain Issues Are Worrisome: The industry has not been immune to the rampant cost inflation prevailing in the sector. Constraints on the availability of raw materials, labor and trucking resources had led to higher lead times for deliveries. However, the industry players have recently been reporting improvements in the supply chain. The companies have been implementing pricing and cost-reduction actions, which are likely to help sustain margins.
Need for Food to Drive Demand for the Industry: Despite the volatility in commodity prices, agricultural equipment demand will continue to be supported by increased global demand for food, stemming from population growth and an increasing proportion of the population aspiring for better living standards. The U.S. agricultural machinery market is projected to reach $52.73 billion by 2027, seeing a compound annual growth rate (CAGR) of 3.3% over 2021-2027. Farm size has been on the rise in the United States, which calls for more laborers. Given the escalation in labor costs every year, farmers are resorting to farming equipment to replace labor.
Technologically Advanced Machinery Continues to Gain Popularity: Customers are increasingly relying on advanced technology, smart farming solutions and mechanization to run their operations. Thus, the industry participants are enhancing investments in launching products equipped with advanced technologies and features to keep up with customers' evolving demands. Precision agriculture technology is expected to be a key catalyst, as it enables farmers to increase yield with reduced input costs and sustainability benefits. Deere, CNHI and AGCO are currently the forerunners in this. CNH Industrial’s acquisition of Raven Industries in November 2021 is a milestone in the company’s digital transformation. It expanded CNHI’s portfolio of precision agriculture technology offerings, and accelerated the development of advanced machine automation and autonomous agriculture technology. The company recently acquired global satellite navigation technology leader Hemisphere, boosting its in-house precision, automation and autonomy technology. CNHI is working toward its plan to reduce reliance on third parties and attain leadership in automation technology.
Zacks Industry Rank Indicates Dull 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 29% 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 in 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.
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 is worth taking a look at the industry’s stock-market performance and valuation picture before that.
Industry Underperform Sector and S&P 500
The Zacks Manufacturing - Farm Equipment industry has underperformed its sector and the Zacks S&P 500 composite over the past 12 months. Stocks in this industry have fallen 11.6% in the past 12 months against the S&P 500’s growth of 8.6%. The Industrial Products sector has gained 21.0% in the said time frame.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward EV/EBITDA ratio, which is a commonly used multiple for valuing farm equipment stocks, we see that the industry is currently trading at 27.95X compared with the S&P 500’s 11.28X. The Industrial Products sector’s forward 12-month EV/EBITDA is 17.19X. 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 traded as high as 37.70X and as low as 15.77X, the median being 25.10X.
4 Manufacturing - Farm Equipment Stocks to Keep an Eye on
Kubota: The company has formulated its long-term vision, “GMB2030.” It 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. The company recently invested in Chouette — an AgTech company that uses artificial intelligence (AI) technology to analyze images captured by cameras to detect diseases and tree vigor, and, based on the data analysis, creates the optimal spray volume of chemicals by unique algorithms. The company will continue to benefit from strong demand for its agricultural equipment. Demand for its construction equipment will be supported by increased infrastructure spending in the United States. Prospects look promising in other parts of the world as well.
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 2024 has been unchanged in the past 30 days and is pegged at $5.56. The company has a trailing four-quarter earnings surprise of 31.2%, on average. It has an estimated long-term earnings growth rate of 10.7% and currently sports a Zacks Rank #1 (Strong Buy).
Deere: The company is witnessing solid growth in order levels, which is expected to aid its top-line performance. DE will continue to benefit from its focus on launching products equipped with advanced technologies and features that provide it with a competitive edge. Efforts to expand in precision agriculture will be a significant growth driver. Replacement demand, triggered by the need to upgrade old equipment, will continue to support its revenues. Considering that Deere also makes construction equipment, it will benefit from strong demand in the residential and non-residential construction markets. DE’s cost-control actions have been supporting margins despite the persistent inflationary pressures.
The Zacks Consensus Estimate for the Moline, IL-based company’s fiscal 2024 earnings has been unchanged over the past 30 days and is pegged at $28.46. The estimate implies year-over-year growth of 46%. DE has a trailing four-quarter earnings surprise of 16.7%, on average. Deere currently has an estimated long-term earnings growth rate of 12.1% and carries a Zacks Rank #3 (Hold).
Price & Consensus: DE
Alamo: Customer demand has been strong in the company’s end markets, which aided ALG in delivering record sales and earnings in the third quarter of 2023, thereby maintaining the trend of solid performances for eight straight quarters. An enhanced supply-chain performance has also benefited sales through this period, while efforts to improve efficiency and lower costs have led to margin expansion. Strong order levels in the Vegetation Management and Industrial Equipment segments bode well for solid performances in the quarters ahead. The acquisition of Timberwolf in October 2023 complements its existing range of tree care products and strengthens its presence in the U.K. and European forestry and tree care markets. ALG also acquired Royal Truck & Equipment, a leading producer of specialized highway safety equipment, including crash attenuator trucks. This marks the company’s foray into the highway safety equipment market, which has solid growth potential.
The Zacks Consensus Estimate for the Seguin, TX-based company’s ongoing-year earnings has been unchanged in 30 days’ time and is pegged at $13.17 per share. The consensus mark implies year-over-year growth of 13.6%. ALG has a trailing four-quarter earnings surprise of 19.8%, on average. It currently carries a Zacks Rank #3.
Price & Consensus: ALG
Lindsay: Increased concerns around food security will drive growth in the international irrigation markets, which bodes well for the company. Lindsay’s infrastructure business is positioned to grow on strong momentum in the Road Zipper System in the future. The business is well-poised for growth in the long run, backed by strong demand for transportation safety products and higher infrastructure spending. Lindsay recently announced plans to invest more than $50 million (the largest in its history) over the next two years in its manufacturing facility in Lindsay, NE. Plans for the modernization include implementing Industry 4.0 technologies, including data connectivity, analytics, artificial intelligence, and the addition of automation and robotics. This will help the company bring its latest innovations, including the Smart Pivo, to market while improving efficiency, enhancing product quality through better monitoring and adjustment of production systems and addressing labor availability challenges.
The Zacks Consensus Estimate for the company’s fiscal 2024 earnings is pegged at $6.29, suggesting year-over-year growth of 26%. LNN has a trailing four-quarter earnings surprise of 10.9%, on average. The company has an estimated long-term earnings growth rate of 10%. This Omaha, NE-based company currently carries a Zacks Rank #3.
Price & Consensus: LNN
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4 Farm Equipment Stocks to Watch Amid Industry Challenges
Despite weak commodity prices and high costs marring the near-term outlook of the Zacks Manufacturing - Farm Equipment industry, it will gain from sustained demand for agricultural equipment required to feed a growing population.
Major players like Deere (DE - Free Report) , Kubota (KUBTY - Free Report) , Alamo Group (ALG - Free Report) and Lindsay (LNN - Free Report) are well-poised to benefit from this demand by expanding their product offerings. The industry’s emphasis on revolutionizing agriculture with technology to make farming automated and more precise is expected to be a major catalyst. Deere, CNH Industrial (CNHI - Free Report) and others are thus actively investing in upping their technology game.
About the Industry
The Zacks Manufacturing - Farm Equipment industry comprises companies that manufacture agricultural equipment. These equipment include tractors, combines, cotton pickers and harvesting equipment; tillage, seeding and application equipment, consisting of sprayers, nutrient management and soil preparation machinery; and hay and forage equipment, comprising self-propelled forage harvesters and attachments, balers and mowers. Some of the companies in the industry also produce turf and utility equipment, consisting of riding lawn equipment and walk-behind mowers, golf course equipment, utility vehicles, commercial mowing equipment, and garden tillers and snow throwers. Some participants manufacture irrigation equipment. Deere, CNH Industrial and AGCO presently hold the positions as the top three global manufacturers of agricultural equipment (in that order).
Trends Shaping the Future of the Manufacturing - Farm Equipment Industry
Low Commodity Prices Act as a Woe: High interest rates and a strong dollar took a toll on agricultural commodity prices last year. Soybean, corn and wheat prices have dipped lately as supply prospects from South America have improved due to favorable weather conditions in the backdrop of low demand. Demand in China for soybeans as animal feed is expected to go down due to the government’s efforts to reduce and substitute the use of soybeans in animal feed to decrease reliance on imports. Chicago corn futures have dropped to $4.40 per bushel at three-year lows. Wheat futures have fallen below $6 per bushel. Low commodity prices will weigh on farm income and might influence the investment decision-making for farmers.
High Costs & Supply-Chain Issues Are Worrisome: The industry has not been immune to the rampant cost inflation prevailing in the sector. Constraints on the availability of raw materials, labor and trucking resources had led to higher lead times for deliveries. However, the industry players have recently been reporting improvements in the supply chain. The companies have been implementing pricing and cost-reduction actions, which are likely to help sustain margins.
Need for Food to Drive Demand for the Industry: Despite the volatility in commodity prices, agricultural equipment demand will continue to be supported by increased global demand for food, stemming from population growth and an increasing proportion of the population aspiring for better living standards. The U.S. agricultural machinery market is projected to reach $52.73 billion by 2027, seeing a compound annual growth rate (CAGR) of 3.3% over 2021-2027. Farm size has been on the rise in the United States, which calls for more laborers. Given the escalation in labor costs every year, farmers are resorting to farming equipment to replace labor.
Technologically Advanced Machinery Continues to Gain Popularity: Customers are increasingly relying on advanced technology, smart farming solutions and mechanization to run their operations. Thus, the industry participants are enhancing investments in launching products equipped with advanced technologies and features to keep up with customers' evolving demands. Precision agriculture technology is expected to be a key catalyst, as it enables farmers to increase yield with reduced input costs and sustainability benefits. Deere, CNHI and AGCO are currently the forerunners in this. CNH Industrial’s acquisition of Raven Industries in November 2021 is a milestone in the company’s digital transformation. It expanded CNHI’s portfolio of precision agriculture technology offerings, and accelerated the development of advanced machine automation and autonomous agriculture technology. The company recently acquired global satellite navigation technology leader Hemisphere, boosting its in-house precision, automation and autonomy technology. CNHI is working toward its plan to reduce reliance on third parties and attain leadership in automation technology.
Zacks Industry Rank Indicates Dull 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 29% 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 in 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.
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 is worth taking a look at the industry’s stock-market performance and valuation picture before that.
Industry Underperform Sector and S&P 500
The Zacks Manufacturing - Farm Equipment industry has underperformed its sector and the Zacks S&P 500 composite over the past 12 months. Stocks in this industry have fallen 11.6% in the past 12 months against the S&P 500’s growth of 8.6%. The Industrial Products sector has gained 21.0% in the said time frame.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward EV/EBITDA ratio, which is a commonly used multiple for valuing farm equipment stocks, we see that the industry is currently trading at 27.95X compared with the S&P 500’s 11.28X. The Industrial Products sector’s forward 12-month EV/EBITDA is 17.19X. 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 traded as high as 37.70X and as low as 15.77X, the median being 25.10X.
4 Manufacturing - Farm Equipment Stocks to Keep an Eye on
Kubota: The company has formulated its long-term vision, “GMB2030.” It 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. The company recently invested in Chouette — an AgTech company that uses artificial intelligence (AI) technology to analyze images captured by cameras to detect diseases and tree vigor, and, based on the data analysis, creates the optimal spray volume of chemicals by unique algorithms. The company will continue to benefit from strong demand for its agricultural equipment. Demand for its construction equipment will be supported by increased infrastructure spending in the United States. Prospects look promising in other parts of the world as well.
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 2024 has been unchanged in the past 30 days and is pegged at $5.56. The company has a trailing four-quarter earnings surprise of 31.2%, on average. It has an estimated long-term earnings growth rate of 10.7% and currently sports a Zacks Rank #1 (Strong Buy).
You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: KUBTY
Deere: The company is witnessing solid growth in order levels, which is expected to aid its top-line performance. DE will continue to benefit from its focus on launching products equipped with advanced technologies and features that provide it with a competitive edge. Efforts to expand in precision agriculture will be a significant growth driver. Replacement demand, triggered by the need to upgrade old equipment, will continue to support its revenues. Considering that Deere also makes construction equipment, it will benefit from strong demand in the residential and non-residential construction markets. DE’s cost-control actions have been supporting margins despite the persistent inflationary pressures.
The Zacks Consensus Estimate for the Moline, IL-based company’s fiscal 2024 earnings has been unchanged over the past 30 days and is pegged at $28.46. The estimate implies year-over-year growth of 46%. DE has a trailing four-quarter earnings surprise of 16.7%, on average. Deere currently has an estimated long-term earnings growth rate of 12.1% and carries a Zacks Rank #3 (Hold).
Price & Consensus: DE
Alamo: Customer demand has been strong in the company’s end markets, which aided ALG in delivering record sales and earnings in the third quarter of 2023, thereby maintaining the trend of solid performances for eight straight quarters. An enhanced supply-chain performance has also benefited sales through this period, while efforts to improve efficiency and lower costs have led to margin expansion. Strong order levels in the Vegetation Management and Industrial Equipment segments bode well for solid performances in the quarters ahead. The acquisition of Timberwolf in October 2023 complements its existing range of tree care products and strengthens its presence in the U.K. and European forestry and tree care markets. ALG also acquired Royal Truck & Equipment, a leading producer of specialized highway safety equipment, including crash attenuator trucks. This marks the company’s foray into the highway safety equipment market, which has solid growth potential.
The Zacks Consensus Estimate for the Seguin, TX-based company’s ongoing-year earnings has been unchanged in 30 days’ time and is pegged at $13.17 per share. The consensus mark implies year-over-year growth of 13.6%. ALG has a trailing four-quarter earnings surprise of 19.8%, on average. It currently carries a Zacks Rank #3.
Price & Consensus: ALG
Lindsay: Increased concerns around food security will drive growth in the international irrigation markets, which bodes well for the company. Lindsay’s infrastructure business is positioned to grow on strong momentum in the Road Zipper System in the future. The business is well-poised for growth in the long run, backed by strong demand for transportation safety products and higher infrastructure spending. Lindsay recently announced plans to invest more than $50 million (the largest in its history) over the next two years in its manufacturing facility in Lindsay, NE. Plans for the modernization include implementing Industry 4.0 technologies, including data connectivity, analytics, artificial intelligence, and the addition of automation and robotics. This will help the company bring its latest innovations, including the Smart Pivo, to market while improving efficiency, enhancing product quality through better monitoring and adjustment of production systems and addressing labor availability challenges.
The Zacks Consensus Estimate for the company’s fiscal 2024 earnings is pegged at $6.29, suggesting year-over-year growth of 26%. LNN has a trailing four-quarter earnings surprise of 10.9%, on average. The company has an estimated long-term earnings growth rate of 10%. This Omaha, NE-based company currently carries a Zacks Rank #3.
Price & Consensus: LNN