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Near-Term Outlook for Farm Equipment Industry Grim
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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.
Let us take a look at the three major themes currently governing the industry:
The Manufacturing - Farm Equipment industry has been grappling with weak demand and lower commodity prices due to the coronavirus outbreak. Moreover, the livestock market has been hit hard fearing the spread of the virus while also straining food supplies. Bleak demand in China due to the pandemic is likely to suppress agricultural commodity prices in the near term. Previously, trade disputes between the United States and China hurt U.S agricultural exports and now exports are likely to suffer due to the coronavirus outbreak. Further, rise in fuel, chemical and fertilizer costs have been straining the industry’s margins
The U.S. farm sector seems to be showing early signs of stabilization following the passage of The United States Mexico Canada Agreement, boosting farmer confidence. Also, per U.S. Department of Agriculture's (USDA) report, net farm income is anticipated to be up 3.3%, year over year, to $96.7 billion in 2020. Improving farm income will enable farmers to invest in new equipment purchases. Also, parts of the United States will likely experience continued wet planting conditions over the next several months. Delayed planting for the second year in a row could provide some tailwind to crop prices. The COVID-19 outbreak has raised concerns that China might be unable to fulfill its commitment to purchase U.S. farm products under the phase one trade deal. However, according to the USDA, China has continued its progress in implementing the partial trade deal and has taken several additional actions to realize its agriculture-related commitments. These factors bode well for the industry.
With customers increasingly relying on advanced technology and mechanization to run their operations, the companies in the industry are also now enhancing their precision farming capabilities, in order to keep up with evolving demands. Moreover, farm equipment demand will be sustained by the replacing demand for age old equipment. Elevated global demand for food and efficient water use will spur long-term demand for the industry’s equipment. Initiatives to expand in the precision agriculture technology will be a game changer for the industry players.
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 #202, which places it at the Bottom 20% of 254 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 beginning of this year, the industry’s earnings estimate for the current year has declined 24%.
Despite the bleak near-term prospects, we will present a few Manufacturing – Farm Equipment stocks that one can retain, supported by their growth prospects. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Outperforms Sector, Lags S&P 500
The Manufacturing - Farm Equipment industry has outperformed the sector over the past year but lagged the S&P 500. Stocks in this industry have depreciated 30.5% compared with the Zacks Industrial Products sector’s loss of 30.8%, while the Zacks S&P 500 declined 18.2%.
One-Year Price Performance
Manufacturing – Farm Equipment Industry Valuation
On the basis of 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 14.42X compared with the S&P 500’s 9.82X. The Industrial Products sector’s forward 12-month EV/EBITDA is at 12.01X. 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 78.30X and as low as 11.97X, with the median being at 17.16X.
Bottom Line
The Manufacturing - Farm Equipment industry is currently under pressure from coronavirus outbreak, lower commodity prices and weak demand. However, farm equipment demand will eventually pick up, spurred by the need to replace ageing equipment. Moreover, benefits from Precision Agriculture initiatives will help over the long haul.
Deere & Company (DE - Free Report) : This Moline, IL-based company has a projected long-term earnings growth rate of 5%. It has an average positive earnings surprise of 5.7% for the trailing four quarters.
Price and Consensus: DE
AGCO Corporation (AGCO - Free Report) : The Zacks Consensus Estimate for this Duluth, GA-based company’s current-year earnings indicates year-over-year growth of 13.9%. The company has an estimated long-term earnings growth rate of 2.3%. It has an average positive earnings surprise of 21.2% for the preceding four quarters.
Price and Consensus: AGCO
Briggs & Stratton Corporation : The Zacks Consensus Estimate for this Wauwatosa, WI-based company's fiscal 2020 earnings suggests 59.4% year-over-year growth.
Price and Consensus: BGG
Titan International, Inc. : The Zacks Consensus Estimate for this Quincy, III-based company's ongoing-year earnings indicates a year-over-year surge of 89.5%.
Price and Consensus: TWI
Free: Zacks’ Single Best Stock Set to Double
Today you are invited to download our latest Special Report that reveals 5 stocks with the most potential to gain +100% or more in 2020. From those 5, Zacks Director of Research, Sheraz Mian hand-picks one to have the most explosive upside of all.
This pioneering tech ticker had soared to all-time highs and then subsided to a price that is irresistible. Now a pending acquisition could super-charge the company’s drive past competitors in the development of true Artificial Intelligence. The earlier you get in to this stock, the greater your potential gain.
Image: Bigstock
Near-Term Outlook for Farm Equipment Industry Grim
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.
Let us take a look at the three major themes currently governing the industry:
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 #202, which places it at the Bottom 20% of 254 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 beginning of this year, the industry’s earnings estimate for the current year has declined 24%.
Despite the bleak near-term prospects, we will present a few Manufacturing – Farm Equipment stocks that one can retain, supported by their growth prospects. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Outperforms Sector, Lags S&P 500
The Manufacturing - Farm Equipment industry has outperformed the sector over the past year but lagged the S&P 500. Stocks in this industry have depreciated 30.5% compared with the Zacks Industrial Products sector’s loss of 30.8%, while the Zacks S&P 500 declined 18.2%.
One-Year Price Performance
Manufacturing – Farm Equipment Industry Valuation
On the basis of 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 14.42X compared with the S&P 500’s 9.82X. The Industrial Products sector’s forward 12-month EV/EBITDA is at 12.01X. 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 78.30X and as low as 11.97X, with the median being at 17.16X.
Bottom Line
The Manufacturing - Farm Equipment industry is currently under pressure from coronavirus outbreak, lower commodity prices and weak demand. However, farm equipment demand will eventually pick up, spurred by the need to replace ageing equipment. Moreover, benefits from Precision Agriculture initiatives will help over the long haul.
We are presenting four stocks carrying a Zacks Rank #3 (Hold) that are well poised to grow. 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 projected long-term earnings growth rate of 5%. It has an average positive earnings surprise of 5.7% for the trailing four quarters.
Price and Consensus: DE
AGCO Corporation (AGCO - Free Report) : The Zacks Consensus Estimate for this Duluth, GA-based company’s current-year earnings indicates year-over-year growth of 13.9%. The company has an estimated long-term earnings growth rate of 2.3%. It has an average positive earnings surprise of 21.2% for the preceding four quarters.
Price and Consensus: AGCO
Briggs & Stratton Corporation : The Zacks Consensus Estimate for this Wauwatosa, WI-based company's fiscal 2020 earnings suggests 59.4% year-over-year growth.
Price and Consensus: BGG
Titan International, Inc. : The Zacks Consensus Estimate for this Quincy, III-based company's ongoing-year earnings indicates a year-over-year surge of 89.5%.
Price and Consensus: TWI
Free: Zacks’ Single Best Stock Set to Double
Today you are invited to download our latest Special Report that reveals 5 stocks with the most potential to gain +100% or more in 2020. From those 5, Zacks Director of Research, Sheraz Mian hand-picks one to have the most explosive upside of all.
This pioneering tech ticker had soared to all-time highs and then subsided to a price that is irresistible. Now a pending acquisition could super-charge the company’s drive past competitors in the development of true Artificial Intelligence. The earlier you get in to this stock, the greater your potential gain.
See 5 Stocks Set to Double>>