For the second quarter of 2017, industrial production — a measure of output at factories, mines and utilities — rose at an annual rate of 4.7%. This was driven by impressive growth in mining and utilities, and marked a substantial improvement over the first-quarter’s gain of 1.4%. Industrial production inched up 0.2% in July, its sixth consecutive monthly increase.
Government policies encouraging better trade relations, increase in infrastructural investments, job creation and high consumer-end demand will accelerate growth of the U.S. economy. This in turn will prove beneficial for industrial stocks.
In the past year, the industrial products sector has clocked a gain of 18.7%, ahead of the S&P 500's climb of 15.9%.
Consequently, the industrial products sector (one of the 16 broad Zacks sectors) is currently enjoying a Zacks Sector Rank of 2, which puts it in the top 13% of the 16 Zacks sectors. Notably, the Industrial Products sector put up 18.8% growth in earnings in second-quarter 2017 and 8.3% growth in earnings is projected for third-quarter 2017 and 16.7% for the fourth quarter. (Read more: Favorable Earnings Trend Expected to Continue)
In this context, we focus on two industrial stocks, AGCO Corp. (AGCO - Free Report) and Terex Corp. (TEX - Free Report) . AGCO is a leading manufacturer and distributor of agricultural equipment and related replacement parts with a market capitalization of $5.39 billion, while Terex is a global manufacturer of a broad range of construction and mining related capital equipment with a market capitalization of $3.54 billion.
While both the stocks sport a Zacks Rank #1 (Strong Buy), it will be interesting to see which stock is better positioned in terms of fundamentals.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Other top-ranked stocks in the same industry that are worth considering include Caterpillar Inc. (CAT - Free Report) and Komatsu Ltd. (KMTUY - Free Report) , both carrying a Zacks Rank #1.
AGCO carries a VGM Score of A while Terex has a VGM Score of D. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three factors. Our research shows that stocks with a VGM Score of A or B when combined with a Zacks Rank #1 or 2 offer the best upside potential. This round understandably goes to AGCO.
In the past year, the Machinery industry has witnessed an increase of 32.7%. Both Terex and AGCO have outpaced the industry with a respective 74.4% and 46.8% surge. This round goes to Terex without a question.
The EV/EBITDA metric is usually used to compare two stocks within the same industry or sector and has an edge over other metrics such as P/E because it is not affected by the different capital structures of the two companies.
Compared with machinery industry's EV/EBITDA ratio of 11.6, Terex is over-priced, with a reading of 18.1. Meanwhile, AGCO is much cheaper with a trailing 12-month EV/EBITDA of 10.7. Clearly, AGCO is cheaper in terms of valuation.
Inventory Turnover Ratio
This is one of the most important financial ratios, which is widely used by industrial companies to measure their ability to utilize inventories.
In the last year, the inventory turnover ratio for AGCO and Terex has been 3.49% and 3.87%, respectively, lower than the machinery industry's level of 3.92%. Terex has registered better inventory turnover than AGCO.
Return on Assets
Return on assets (ROA) is one of the key financial ratios for industrial companies as they rely heavily on inventory to create revenues. An above-average ROA denotes that the company in question is generating earnings by effectively managing assets.
AGCO and Terex’s ROA for the trailing 12-months (TTM) is 2.67% and 1.80%, respectively, both below the industry's level of 4.59%. AGCO scores better on this front.
In the last one-year period, AGCO's dividend yield was pegged at 0.81% while Terex’s is lower at 0.75%. Though both have a dividend yield lower than the machinery industry's dividend yield of 1.65%. On a comparative basis, AGCO scores better.
Both Terex and AGCO have lower debt-to-capital ratio of 38.9% and 38.5%, respectively, compared with the industry average of 66.6%. AGCO holds an edge here.
AGCO’s net margins in the trailing 12-month period is at 2.60% while Terex scores 1.97%, both lower than the industry average of 7.91%. AGCO fares better on this front.
Earnings Surprise History
Taking a look at both the companies surprise history, AGCO has an average positive earnings surprise history of 39.70% in the trailing four quarters. Terex has an average positive earnings surprise of 122.78%. Terex is undoubtedly the winner of this round.
Earnings Estimate Revisions, Growth
On one hand, earnings estimates for AGCO have gone up 8% for fiscal 2017 and 7% for fiscal 2018 in the past 60 days. On the other hand, estimates for Terex have gone up 19% and 16%.
AGCO's fiscal 2017 earnings estimates reflects year-over-year growth of around 8% while the fiscal 2018 earnings estimate reflects year-over-year growth of 5%. Terex’s earnings estimates for fiscal 2017 and fiscal 2018 depict a projected growth of 30% and 70%, respectively. AGCO has expected long term earnings growth rate of 13.5% lower than Terex’s 19.7%. Overall, Terex is a clear winner here.
Our comparative analysis shows that Terex holds an edge over AGCO when considering price performance, inventory turnover, earnings surprise and projections. Considering the parameters of valuation, VGM Score, return on assets, dividend, leverage and net margins, AGCO seems better-poised than Terex.
Based on our comparative analysis, AGCO presently has an advantage over Terex.
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