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 the companies also provide irrigation equipment.
The industry participants sell their equipment and related parts through independent retail dealer networks and retail outlets. The 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 plagued by tariff and trade concerns as exports account for about 20% of U.S. farm income. High tariffs disrupted normal marketing patterns, raising costs by compelling producers to seek new markets in order to clear the surplus stock. Moreover, stringent and cumbersome entry procedures affected the quality and marketability of perishable crops, elevating marketing costs for producers. Further, increase in fuel, chemical and fertilizer costs are weighing on the industry’s margins. Nevertheless, possibility of renewed talks to end the prolonged trade dispute and China agreeing to the purchase U.S. farm products – are fueling optimism regarding the industry’s prospects in the days ahead.
- Per the U.S. Department of Agriculture's (USDA) latest available projections, net farm is anticipated to increase 10% year over year in 2019 following a decline of 16% in 2018. Improving farm income will enable farmers to invest in equipment purchases. Further, the USDA’s $16-billion aid for American farmers who have been affected by the trade war will also boost equipment purchases. Farm equipment demand will also be sustained by the need to replace the aging equipment. Inclement weather has delayed the planting season in most productive farming regions in the United States, which negatively impacted crop supply while demand remains high. This imbalance will support prices, which bodes well for farmers. Long-term demand for the industry’s equipment will be fueled by increased global demand for food and efficient water use.
- 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 demand. Notably, these advancements use predictive analytics to generate notifications and repair instructions to minimize machine downtime, coordinate machines to execute jobs more effectively and efficiently. 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 bright 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 #39, which places it at the top 14% 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.
Our proprietary Heat Map shows that the industry’s rank has remained in the top half over the past four weeks.
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 picture.
Industry Outperforms S&P 500 and Sector
The Manufacturing - Farm Equipment industry has outperformed the S&P 500 over the past year. While the stocks in this industry have collectively gained 11.3%, the Zacks S&P 500 grew 5.6%. Meanwhile, the Zacks Industrial Products Sector declined 3.5%.
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 15.1x compared with the S&P 500’s 12.1X. The Industrial Products sector’s forward 12-month EV/EBITDA is at 14.0X. 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 78.3X and as low as 9.2X, with the median being at 17.0X.
Price hikes and prudent cost management will help sustain margins in the wake of higher material costs. Resolution of the trade war, USDA’s $16 billion relief package and China buying agricultural producers will lift the industry. 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 one stock with a Zacks Rank #1 (Strong Buy) and three stocks with a Zacks Rank #3 (Hold) that are well poised to grow. You can see the complete list of today’s Zacks #1 Rank stocks here.
Kubota Corp. (KUBTY): This Osaka, Japan--based company is a Zacks Ranked #1 stock. The Zacks Consensus Estimate for earnings for fiscal 2019 has gone up 9% over the past 90 days. The company has a long term estimated earnings growth of 4.82%.
Price and Consensus: KUBTY
AGCO Corporation (AGCO): This Duluth, GA-based company’s Zacks Consensus Earnings Estimate for fiscal 2019 indicates year-over-year growth of 26.74%. The company has estimated long-term earnings growth rate of 13.41%. The company has an average positive earnings surprise of 31.01% in the trailing four quarters. The stock carries a Zacks Rank #3.
Price and Consensus: AGCO
Deere & Company (DE): The Zacks Consensus EPS estimate for this Moline, IL-based company for fiscal 2019 reflects year-over-year growth of 9.16%. The estimated long-term earnings growth rate for this Zacks Ranked #3 company is pegged at 8.5%.
Price and Consensus: DE
Titan International, Inc. (TWI): The Zacks Consensus Estimate for earnings for fiscal 2019 for this Quincy, IL-based company indicates year-over-year growth of 37.04%. The company carries a Zacks Rank #3.
Price and Consensus: TWI
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