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The Zacks Manufacturing - Farm Equipment industry will benefit from upbeat commodity prices, which will boost farm income and lead to higher spending 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.
Players like Deere & Co., AGCO Corp., Lindsay Corp., Alamo Group Inc. and Titan International, Inc. are well-poised to gain from 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, comprising self-propelled forage harvesters and attachments, balers and mowers.
Some of these companies 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 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
Improving Farm Income Bodes Well: The USDA (U.S Department of Agriculture) projects net farm income at $147.7 billion for 2022 – the highest since 2013 and indicating a 5.2% year-over-year increase. Cash receipts for agricultural commodities are expected at record levels. Receipts for soybeans are expected to be up 30.6%, corn by 16.7% and wheat by 33.7% compared to the prior-year levels, all led by higher prices.
Combined receipts for corn, soybeans and wheat are forecast to increase by $30.7 billion, accounting for most of the rise in crop cash receipts. The upbeat outlook for corn and soybeans, which are the most important grains for cash crop farming, bodes well for farmer sentiment and will likely translate into improved order levels. High commodity prices will drive farm income and persuade farmers to continue spending on agricultural equipment. Apart from this, the need to replace aging equipment will sustain demand.
High Costs & Supply Chain Woes Remain: Even though commodity prices have been gaining lately, renewed coronavirus-induced lockdowns in China fueled concerns of weakening demand that might impact prices again. Farmers will again adopt a cautious stance regarding their spending on equipment, which will hurt the industry's top-line performance. Also, farmers are witnessing higher production costs, particularly fertilizers. This might impede their purchasing power if commodity prices decline again.
The industry is also facing raw material cost inflation, particularly steel and increased transportation costs. Constraints on the availability of raw materials, labor and trucking resources have led to higher lead times for deliveries. Labor shortage might affect their production levels and impair their ability to meet demand. Consequently, the industry players are 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 amid the current scenario.
Advancement in Latest Technology: 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. Initiatives to expand in precision agriculture technology will be a game-changer for the 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 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 #69, which places it at the top 27% 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 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.
Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic about this group's earnings growth potential. The Manufacturing - Farm Equipment industry's 2022 earnings estimates have improved 3% so far this year.
Before we present a few stocks that you may want to consider for your portfolio, let's take a look at the industry's recent stock market performance and valuation.
Industry Outperforms Sector and S&P 500
The Zacks Manufacturing - Farm Equipment industry has outperformed its own sector and the Zacks S&P 500 composite over the past 12 months. Stocks in this industry have fallen 4.6% in the past 12 months compared with the S&P 500's decline of 14.4%. The Industrial Products sector has declined 21.7% in the said time frame.
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 19.92X. The Industrial Products sector's forward 12-month EV/EBITDA is 19.07X.
Over the last five years, the industry has traded as high as 26.92X and as low as 13.35X, with the median being at 16.40X.
5 Manufacturing - Farm Equipment Stocks to Keep an Eye On
Lindsay: Improving agricultural commodity prices will continue to boost farm income, fueling demand for the company's irrigation equipment. This momentum, along with increased concerns around food security, will drive growth in the company's international markets. Lindsay is benefiting from increased selling prices and higher unit sales volumes in most international irrigation markets.
The company'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. A strong balance sheet, focus on introducing technologically advanced products and acquisitions will drive growth. Shares of the company have gained 15% over the past six months.
The Zacks Consensus Estimate for Lindsay's earnings for fiscal 2022 is currently pegged at $5.95, suggesting year-over-year growth of 44.1%. The estimates have moved north by 20.7% in the past 60 days. The company has a trailing four-quarter earnings surprise of 25.7%, on average. It carries a Zacks Rank #1 (Strong Buy).
Alamo Group: Customer demand has been strong in the company's end markets, which resulted in ALG achieving the highest quarterly sales and earnings in its history. The company's Vegetation Management Division is benefiting from strong retail demand for agricultural, forestry, tree care and governmental mowing products in both North America and Europe.
The Industrial Equipment segment is gaining from higher sales of its excavators and vacuum truck products. The improvement in efficiency, combined with better pricing, supported gross margin performance and helped the company deliver double-digit income from operations growth for the first time since the third quarter of 2020.
The stock has declined 9.1% in the past six months, mainly due to the continued higher material and transportation costs and supply chain disruptions, which have resulted in material shortages lately.
The Zacks Consensus Estimate for the Seguin, TX-based company's ongoing-year earnings has been revised 5.9% upward in 60 days' time to $8.61. It currently carries a Zacks Rank #2 (Buy).
Deere: The company will continue to benefit from its focus on launching products with advanced technologies and features that provide it with a competitive edge. Efforts to expand in precision agriculture will be a significant growth driver. Deere, the world's largest producer of agricultural equipment, 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. Considering that it also makes construction equipment, it will benefit from strong demand in the residential and non-residential construction markets. Its cost-control actions will drive margins. Its shares have declined 1.8% in the past six months.
The Zacks Consensus Estimate for the Moline, IL-based company's fiscal 2022 earnings is currently pegged at $22.94. The estimate implies year-over-year growth of 20.8%. DE has a trailing four-quarter earnings surprise of 7.8%, on average. Deere has an estimated long-term earnings growth rate of 12.6%. DE currently carries a Zacks Rank #3 (Hold).
AGCO: The company has been gaining from 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 driven margin expansion across all regions over the past few quarters. The stock has declined 9.3% in the past six months.
The Zacks Consensus Estimate for the company's fiscal 2022 earnings currently stands at $11.87 and suggests growth of 14.3% year over year. The estimate has moved north by 0.4% in the past 60 days. 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 37.5%, on average. The company has an estimated long-term earnings growth rate of 9.6%.
Titan International: 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 continue to support improved order levels for the agricultural segment.
The earthmoving and construction end markets look promising as the undercarriage business sustains a strong momentum with increased infrastructure and ramping construction activities acting as key catalysts. Backed by this traction, the company's shares have gained 22% in the past six months. Its continued cost reduction and cash preservation measures position it well for growth.
The Zacks Consensus Estimate for the company's earnings for fiscal 2022 currently stands at $2.19 per share, suggesting a year-over-year improvement of 158%. It has a trailing four-quarter earnings surprise of 47%, on average. TWI currently carries a Zacks Rank #3.
Why Haven't You Looked at Zacks' Top Stocks?
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Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performancefor information about the performance numbers displayed in this press release.
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Zacks Industry Outlook Highlights Deere & Co, AGCO, Lindsay, Alamo Group and Titan International
For Immediate Release
Chicago, IL – September 7, 2022 – Today, Zacks Equity Research discusses Deere & Co. (DE - Free Report) , AGCO Corp. (AGCO - Free Report) , Lindsay Corp. (LNN - Free Report) , Alamo Group Inc. (ALG - Free Report) and Titan International, Inc.
Industry: Farm Equipment
Link: https://www.zacks.com/commentary/1977000/5-farm-equipment-stocks-to-watch-in-a-promising-industry
The Zacks Manufacturing - Farm Equipment industry will benefit from upbeat commodity prices, which will boost farm income and lead to higher spending 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.
Players like Deere & Co., AGCO Corp., Lindsay Corp., Alamo Group Inc. and Titan International, Inc. are well-poised to gain from 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, comprising self-propelled forage harvesters and attachments, balers and mowers.
Some of these companies 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 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
Improving Farm Income Bodes Well: The USDA (U.S Department of Agriculture) projects net farm income at $147.7 billion for 2022 – the highest since 2013 and indicating a 5.2% year-over-year increase. Cash receipts for agricultural commodities are expected at record levels. Receipts for soybeans are expected to be up 30.6%, corn by 16.7% and wheat by 33.7% compared to the prior-year levels, all led by higher prices.
Combined receipts for corn, soybeans and wheat are forecast to increase by $30.7 billion, accounting for most of the rise in crop cash receipts. The upbeat outlook for corn and soybeans, which are the most important grains for cash crop farming, bodes well for farmer sentiment and will likely translate into improved order levels. High commodity prices will drive farm income and persuade farmers to continue spending on agricultural equipment. Apart from this, the need to replace aging equipment will sustain demand.
High Costs & Supply Chain Woes Remain: Even though commodity prices have been gaining lately, renewed coronavirus-induced lockdowns in China fueled concerns of weakening demand that might impact prices again. Farmers will again adopt a cautious stance regarding their spending on equipment, which will hurt the industry's top-line performance. Also, farmers are witnessing higher production costs, particularly fertilizers. This might impede their purchasing power if commodity prices decline again.
The industry is also facing raw material cost inflation, particularly steel and increased transportation costs. Constraints on the availability of raw materials, labor and trucking resources have led to higher lead times for deliveries. Labor shortage might affect their production levels and impair their ability to meet demand. Consequently, the industry players are 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 amid the current scenario.
Advancement in Latest Technology: 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. Initiatives to expand in precision agriculture technology will be a game-changer for the 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 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 #69, which places it at the top 27% 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 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.
Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic about this group's earnings growth potential. The Manufacturing - Farm Equipment industry's 2022 earnings estimates have improved 3% so far this year.
Before we present a few stocks that you may want to consider for your portfolio, let's take a look at the industry's recent stock market performance and valuation.
Industry Outperforms Sector and S&P 500
The Zacks Manufacturing - Farm Equipment industry has outperformed its own sector and the Zacks S&P 500 composite over the past 12 months. Stocks in this industry have fallen 4.6% in the past 12 months compared with the S&P 500's decline of 14.4%. The Industrial Products sector has declined 21.7% in the said time frame.
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 19.92X. The Industrial Products sector's forward 12-month EV/EBITDA is 19.07X.
Over the last five years, the industry has traded as high as 26.92X and as low as 13.35X, with the median being at 16.40X.
5 Manufacturing - Farm Equipment Stocks to Keep an Eye On
Lindsay: Improving agricultural commodity prices will continue to boost farm income, fueling demand for the company's irrigation equipment. This momentum, along with increased concerns around food security, will drive growth in the company's international markets. Lindsay is benefiting from increased selling prices and higher unit sales volumes in most international irrigation markets.
The company'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. A strong balance sheet, focus on introducing technologically advanced products and acquisitions will drive growth. Shares of the company have gained 15% over the past six months.
The Zacks Consensus Estimate for Lindsay's earnings for fiscal 2022 is currently pegged at $5.95, suggesting year-over-year growth of 44.1%. The estimates have moved north by 20.7% in the past 60 days. The company has a trailing four-quarter earnings surprise of 25.7%, on average. It carries a Zacks Rank #1 (Strong Buy).
You can see the complete list of today's Zacks #1 Rank stocks here.
Alamo Group: Customer demand has been strong in the company's end markets, which resulted in ALG achieving the highest quarterly sales and earnings in its history. The company's Vegetation Management Division is benefiting from strong retail demand for agricultural, forestry, tree care and governmental mowing products in both North America and Europe.
The Industrial Equipment segment is gaining from higher sales of its excavators and vacuum truck products. The improvement in efficiency, combined with better pricing, supported gross margin performance and helped the company deliver double-digit income from operations growth for the first time since the third quarter of 2020.
The stock has declined 9.1% in the past six months, mainly due to the continued higher material and transportation costs and supply chain disruptions, which have resulted in material shortages lately.
The Zacks Consensus Estimate for the Seguin, TX-based company's ongoing-year earnings has been revised 5.9% upward in 60 days' time to $8.61. It currently carries a Zacks Rank #2 (Buy).
Deere: The company will continue to benefit from its focus on launching products with advanced technologies and features that provide it with a competitive edge. Efforts to expand in precision agriculture will be a significant growth driver. Deere, the world's largest producer of agricultural equipment, 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. Considering that it also makes construction equipment, it will benefit from strong demand in the residential and non-residential construction markets. Its cost-control actions will drive margins. Its shares have declined 1.8% in the past six months.
The Zacks Consensus Estimate for the Moline, IL-based company's fiscal 2022 earnings is currently pegged at $22.94. The estimate implies year-over-year growth of 20.8%. DE has a trailing four-quarter earnings surprise of 7.8%, on average. Deere has an estimated long-term earnings growth rate of 12.6%. DE currently carries a Zacks Rank #3 (Hold).
AGCO: The company has been gaining from 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 driven margin expansion across all regions over the past few quarters. The stock has declined 9.3% in the past six months.
The Zacks Consensus Estimate for the company's fiscal 2022 earnings currently stands at $11.87 and suggests growth of 14.3% year over year. The estimate has moved north by 0.4% in the past 60 days. 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 37.5%, on average. The company has an estimated long-term earnings growth rate of 9.6%.
Titan International: 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 continue to support improved order levels for the agricultural segment.
The earthmoving and construction end markets look promising as the undercarriage business sustains a strong momentum with increased infrastructure and ramping construction activities acting as key catalysts. Backed by this traction, the company's shares have gained 22% in the past six months. Its continued cost reduction and cash preservation measures position it well for growth.
The Zacks Consensus Estimate for the company's earnings for fiscal 2022 currently stands at $2.19 per share, suggesting a year-over-year improvement of 158%. It has a trailing four-quarter earnings surprise of 47%, on average. TWI currently carries a Zacks Rank #3.
Why Haven't You Looked at Zacks' Top Stocks?
Our 5 best-performing strategies have blown away the S&P's impressive +28.8% gain in 2021. Amazingly, they soared +40.3%, +48.2%, +67.6%, +94.4%, and +95.3%. Today you can access their live picks without cost or obligation.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.