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Trade War Truce a Relief for Agricultural Equipment Industry

Madhurima Das

The prospect of renewed talks to end the prolonged trade dispute between the world's two largest economies — the United States and China — comes as a boon for the agricultural industry which has been hit hard by the prevalent tensions.

Presidents Donald Trump and Xi Jinping agreed to resume trade talks after Trump said he would refrain from imposing additional tariffs on Chinese imports. Trump also mentioned that U.S. companies can resume business with Huawei Technologies. China, in turn, has agreed to purchase U.S. farm products.

This is welcome news for the Manufacturing - Farm Equipment industry which had been witnessing a downtrend for the past few years due to low commodity prices and sluggish farm incomes which adversely impacted spending on farm equipment. While tariffs imposed by the 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 equally hit the industry hard, given that China is the largest export market for U.S. agriculture producers. High tariffs disrupted normal marketing patterns, flaring up costs by forcing producers to find new markets for clearing the surplus stock. Moreover, stringent and cumbersome entry procedures affected the quality and marketability of perishable crops, escalating marketing costs for producers.

Greener Pastures Ahead

Earlier President Trump had authorized the U.S. Department of Agriculture (USDA) to provide a $16-billion aid for American farmers who have been affected by the trade war. Additionally, the government plans to spend around $1.4 billion to purchase surplus commodities affected by trade retaliation, such as fruits, vegetables, some processed foods, beef, pork, lamb, poultry, and milk which 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.

Inclement weather has delayed the planting season in most productive farming regions in the United States, which affected crop supply while demand remains high. This imbalance will support prices, which bodes well for farmers.

Also, 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. Improving farm income will enable farmers to invest in equipment purchases.

Deere & Company DE, one of the major names in the industry, with a market capitalization of $52.5 billion, is expected to be one of the main beneficiaries of improving farm equipment demand in the United States. Also, considering that the company generates around 39% of its revenue overseas, positive developments in the U.S-China negotiations will boost growth.

Industry Outperforms S&P, Valuation is Inexpensive

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 #38, which places it at the top 15% 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.

Stocks in the Manufacturing - Farm Equipment industry have collectively gone up 15.1% over the past month, outperforming the S&P 500’s gain of 7.2% and Industrial Products Sector’s rise of 9.2%.

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 10.84 compared with the S&P 500’s 11.26X and Industrial Products sector’s 14.62X.

Investors keen on the industry may consider Kubota Corp. KUBTY, currently sporting a Zacks Rank #1 (Strong Buy) and AGCO Corporation AGCO, carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here. Investors may also consider Titan International, Inc. (TWI), which carries a Zacks Rank #3 (Hold) currently and has positive growth estimates for the current fiscal year.

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