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USDA's $16B Farm Aid Plan: Relief for Farm Equipment Industry

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President Trump has authorized the U.S. Department of Agriculture (USDA) to provide a $16 billion aid for American farmers who have been affected by the protracted U.S. trade war with China. The program includes $14.5 billion in direct payments to producers with the first payment to be made in late July/early August followed by two more payments in November and early January as market conditions and trade opportunities dictate.
Additionally, the government plans bulk purchases of about $1.4 billion to purchase surplus commodities affected by trade retaliation such as fruits, vegetables, some processed foods, beef, pork, lamb, poultry, and milk. These purchases would then be utilized in food banks, pantries and school meal programs. The USDA also intends to implement a $100 million trade promotion program for livestock producers and certain crops to help industry sectors develop new markets. A similar program was launched as part of the administration’s 2018 trade relief program for agriculture.

The trade war has impacted a host of U.S. commodities, including crops like soybeans, corn, wheat, cotton, rice, and sorghum; livestock products like milk and pork; and several kinds of fruits, nuts, and other crops. Further, high tariffs disrupted normal marketing patterns, elevating costs by forcing producers to find new markets to clear the surplus stock. Moreover, stringent and cumbersome entry procedures affected quality and marketability of perishable crops escalating marketing costs for producers.

This aid program will help farmers to absorb some of the additional costs. It is definitely welcome news for the Manufacturing - Farm Equipment industry, which comprises companies that manufacture agricultural equipment. The industry had been witnessing a downtrend over the past few years owing to the impact of low commodity prices and sluggish farm incomes which impacted spending on farm equipment. Tariff and trade concerns added to woes last year. While tariffs imposed by Trump administration on steel and aluminum hurt manufacturers by inflating raw material costs, China’s retaliation with tariffs on U.S. food and agricultural exports hit the industry hard, as exports account for about 20% of U.S. farm income. This further weighed on farmer sentiment, leading them to delay their equipment purchases.

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 #181, which places it at the bottom 26% 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 Manufacturing - Farm Equipment industry has underperformed the S&P 500 over the past year. While the stocks in this industry have collectively declined 10.6%, the Zacks S&P 500 rose 4.4%. Meanwhile, the Zacks Industrial Products Sector declined 6.4%.

Industry Valuation is Inexpensive

On the basis of trailing 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 9.9 compared with the S&P 500’s 10.7X. The Industrial Products sector’s forward 12-month EV/EBITDA is at 10.9X.

Greener Pastures Ahead

Per the USDA’s latest available projections, following a decline of 16% in 2018, net farm is anticipated to increase 10% year over year in 2019. This bodes well for the industry. Further, farm equipment demand will be driven by the need to replace the aging equipment. Moreover, the current tax reforms will encourage equipment purchases.

The $16 billion aid program will buoy farmer sentiment and aid the Manufacturing - Farm Equipment industry. Further, price hikes and prudent cost management will help sustain margins.

Despite the near-term headwinds, the long-term prospects for the industry’s equipment will be fueled by increased global demand for food and efficient water use. Benefits from Precision Agriculture initiatives will help over the long haul.

Investors keen on the industry may consider Kubota Corp. KUBTY sporting a Zacks Rank #1 (Strong Buy) and AGCO Corporation AGCO carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here. Investors may also retain Zacks Rank #3 (Hold) stocks like Deere & Company (DE - Free Report) and Titan International, Inc. TWI. All these stocks have positive growth estimates for the current fiscal.

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