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Near-Term Prospects for Farm Equipment Stocks Appear Bleak

Zacks Equity Research

The Zacks Manufacturing - Farm Equipment industry primarily comprises companies which 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 manufacture 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. While some of the companies also provide   irrigation equipment.

The companies in the industry 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 with tariff and trade concerns. Tariffs imposed by Trump administration on steel and aluminum hurt manufacturers by inflating raw material costs. China had retaliated with tariffs on U.S. food and agricultural exports. This hit the industry hard, as exports account for about 20% of U.S. farm income. The trade issues weighed on farmer sentiment, leading them to delay their equipment purchases. Further, increase in fuel, chemical and fertilizer costs are weighing on the industry’s margins. Nevertheless, positive developments – ongoing talks to resolve the conflict and China agreeing to make “substantial” purchases of U.S. agricultural products – are likely to bolster the industry prospects eventually.
     
  • The needs of the industry’s customers are evolving, as they are now reliant on advanced technology and mechanization to run their operations. Consequently, the companies in the industry are now enhancing their precision farming capabilities — the need of the hour. 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 players in the industry.
     
  • The Manufacturing - Farm Equipment industry has 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. Per the United States Department of Agriculture’s (“USDA”) latest available projections, after a decline of 8% in 2018, net farm is anticipated to increase 12% year over year in 2019. Farm equipment demand will primarily be driven by the need to replace the aging equipment. Moreover, the current tax reforms will encourage equipment purchases. Despite weak current agricultural conditions, long-term demand for the industry’s equipment will be fueled by increased global demand for food and efficient water use.
     

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 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 #197, which places it at the bottom 23% 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 industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimate for the current year has gone down 1%.

Despite the bleak near-term prospects of the industry, we will present a few farm equipment stocks that one can retain given their growth prospects. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Lags S&P 500 and Sector on Shareholder Returns

The Manufacturing - Farm Equipment industry has underperformed the S&P 500 over the past year. While the stocks in this industry have collectively declined 5.4%, the Zacks S&P 500 rose 1.4%. Meanwhile, the Zacks Industrial Products Sector declined 8.2%.

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 12.1x compared with the S&P 500’s 9.8X.The Industrial Products sector’s forward 12-month EV/EBITDA is at 10.9X. 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, as low as 9.2X with a median of 17.0X.

Bottom Line

The Manufacturing - Farm Equipment industry is currently under pressure from raw material and freight cost headwinds.However, price hikes and prudent cost management will help sustain margins. Further, USDA has declared to provide up to $12 billion relief package to U.S. farmers to protect them from the impact of trade disputes. 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.

None of the stocks in the Zacks Manufacturing - Farm Equipment space currently sport a Zacks Rank #1 (Strong Buy) or 2 (Buy). However, we are presenting four Zacks Ranked #3 (Hold) stocks that are well poised to grow despite the challenges. You can see the complete list of today’s Zacks #1 Rank stocks here.

Deere & Company (DE): The Zacks Consensus EPS estimate for this Moline, IL-based company for fiscal 2019 reflects year-over-year growth of 20%. The company has estimated long-term earnings growth rate of 8.5%. 

Price and Consensus: DE

 

AGCO Corporation (AGCO): This Duluth, GA-based company’s Zacks Consensus Earnings Estimate for fiscal 2019 indicates year-over-year growth of 20%. The company has estimated long-term earnings growth rate of 14.4%. The company has delivered average positive earnings surprise of 59.36% in the trailing four quarters. 

Price and Consensus: AGCO

 

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 151%. The company has delivered average positive earnings surprise of 127.02% over the trailing four quarters.

Price and Consensus: TWI

 

Lindsay Corporation (LNN): This Omaha, NE-based company has an estimated long-term earnings growth rate of 14.4%.

Price and Consensus: LNN

 


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Titan International, Inc. (TWI) : Free Stock Analysis Report
 
Lindsay Corporation (LNN) : Free Stock Analysis Report
 
Deere & Company (DE) : Free Stock Analysis Report
 
AGCO Corporation (AGCO) : Free Stock Analysis Report
 
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