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Farm Equipment Makers Pull Guidances on Coronavirus Impact

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Two prominent Manufacturing – Farm Equipment industry players, Deere & Company DE and AGCO Corporation AGCO, pulled their financial guidances for the current year and halted productions in the wake of the coronavirus pandemic. The outbreak has caused global economic uncertainties and supply-chain disruptions.  

Companies Pull Guidances, Suspend Operations

Deere delivered stellar results in the fiscal first quarter on early signs of stabilization witnessed in the U.S farm sector and improving farmer sentiment. However, the coronavirus outbreak has clouded the company’s future prospects. The farm equipment giant stated it is reducing and temporarily suspending operations at some of its facilities in the United States in a bid to contain the spread of COVID-19. Moreover, the company’s European operations are likely to be hit hard, Europe being the epicenter of the pandemic right now. The outbreak is expected to adversely impact Deere’s demand for its products. As a result, the company has withdrawn its financial guidance for 2020.

In response to the COVID-19 outbreak, and uncertainty regarding the scale and magnitude of its impacts, AGCO has also withdrawn its financial guidance for the current year. Production has been suspended in many of the company’s European facilities, primarily due to supply-chain constrains and material shortage. Additional production disruptions in other regions are expected as well. Nevertheless, the company expects demand for grain and protein to remain during this difficult, time and will provide food safety to its dealers and farmers.

Sadly, the number of coronavirus cases across the globe has skyrocketed to 332,930, while the death toll stands at 14,510. To contain the spread of the virus, most countries have imposed travel restrictions and other measures, such as constrained movement and quarantines. Both commodity and stock markets have been battered by the outbreak, with businesses shutting down in China as well as in the United States and Europe.

Bleak Farm Prospects & Trade Deal Linger

The Manufacturing - Farm Equipment industry is bearing the brunt of weak demand and lower commodity prices due to the pandemic. Bleak demand in China is likely to depress agricultural commodity prices in the near term. Previously, trade disputes between the United States and China hurt U.S agricultural exports and now agricultural exports to the latter’s are likely to suffer due to the virus outbreak.

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. Moreover, 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 might provide some tailwind to crop prices.

The Zacks Manufacturing - Farm Equipment industry has depreciated 30.9% over the past year compared with the S&P 500’s decline 20.6% decline. The industry falls under the Zacks Industrial Products sector, which slumped 34.6%.

The industry currently carries a Zacks Industry Rank #220, which places it at the Bottom 13% of 254 Zacks industries. The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, suggests gloomy prospects for the days to come. 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.

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 been down as much as 24%.

Growth Potentials Ahead

Though the industry has been plagued by the coronavirus outbreak, lower commodity prices and weak demand, its long-term fundamentals look healthy.

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 the U.S. Department of Agriculture's (USDA) report, net farm income is anticipated to be up 3.3%, year on year, to $96.7 billion in 2020. Improving farm income will enable farmers to invest in new equipment purchases.

This apart, with customers increasingly relying on advanced technology, the companies in the industry are now enhancing the precision farming capabilities, in order to keep up with evolving demands. Also, farm equipment demand will be sustained by the replacing demand for age-old equipment, while initiatives to expand in the precision agriculture technology will be a game changer for industry players.

Investors interested in the industry can consider Kubota Corporation (KUBTY - Free Report) and Titan International, Inc. TWI, which currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Kubota has an estimated long-term earnings growth rate of 4.6%. The Zacks Consensus Estimate for Titan International’s ongoing-year earnings indicates a year-over-year surge of 89.5%.

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