Zacks Industry Outlook Highlights Deere, Kubota, AGCO and Titan International
For Immediate Release
Chicago, IL – October 31, 2023 – Today, Zacks Equity Research discusses Deere & Co. DE, Kubota Corp. KUBTY, AGCO Corp. AGCO and Titan International TWI.
Industry: Farm Equipment
Link: https://www.zacks.com/commentary/2174633/4-farm-equipment-stocks-to-watch-in-a-promising-industry
The Zacks Manufacturing - Farm Equipment industry is set to benefit from increased agricultural equipment demand to meet the food requirements of a growing population in the days ahead. The industry's focus on revolutionizing agriculture with technology to make farming automated, easy to use and more precise across the production process is also likely to aid growth.
Players like Deere & Co., Kubota Corp., AGCO Corp. and Titan International are well-poised to gain from cost-control measures and efforts to bring technologically advanced products to the market.
About the Industry
The Zacks Manufacturing - Farm Equipment industry comprises companies that manufacture agricultural equipment. These include tractors, combines, cotton pickers and harvesting equipment; tillage, seeding and application equipment, consisting of sprayers, nutrient management and soil preparation machinery; and hay and forage equipment, comprising self-propelled forage harvesters and attachments, balers, and mowers.
Some of these companies produce turf and utility equipment, consisting of riding lawn equipment and walk-behind mowers, golf course equipment, utility vehicles, commercial mowing equipment, and garden tillers and snow throwers. Some participants manufacture irrigation equipment. The industry players sell their equipment and related parts through independent retail dealer networks and retail outlets. This industry caters to the agriculture, golf and landscape markets.
Trends Shaping the Future of the Manufacturing - Farm Equipment Industry
Growing Demand for Food to Sustain the Industry: The USDA (U.S. Department of Agriculture) projects net farm income at $141.3 billion for 2023, which is 22.8% lower than that reported in 2022. The decline is mainly due to lower direct government payments. In inflation-adjusted 2023 dollars, net farm income is forecast to decrease 25.4% in 2023. Despite the decline, this projected figure will be above the 2003-22 averages (in inflation-adjusted dollars).
Farm size has been on the rise in the United States, which calls for more laborers. Given the escalation in labor costs every year, farmers are resorting to farming equipment to replace labor. The need to replace aging equipment will sustain the demand for the industry. Agricultural equipment Demand will continue to be supported by increased global demand for food, both from population growth and an increasing proportion of the population aspiring for better living standards. The U.S. agricultural machinery market is projected to reach $52.73 billion by 2027, seeing a CAGR of 3.3% over 2021-2027.
Pricing Actions to Offset High Costs: The industry is also facing cost inflation, particularly steel, and increased transportation costs. Constraints on the availability of raw materials, labor and trucking resources have led to higher lead times for deliveries. Recently, industry players have been reporting improvements in the supply-chain issues. Also, industry players have been making efforts to bolster their financial conditions, conserve cash and improve profitability. The companies have been implementing pricing and cost-reduction actions, which are likely to help sustain margins in the current scenario.
Technologically Advanced Products to Aid Growth: Customers are increasingly relying on advanced technology, smart farming solutions and mechanization to run their operations. Thus, the industry participants are enhancing investments in launching products equipped with advanced technologies and features to keep up with customers' evolving demands. Initiatives to advance precision agriculture technology will be a game-changer for the industry players, given its productivity-enhancing and sustainability benefits.
Demand continues to grow for popular features, which include automatic guide machines in the field and equipment that plants seeds, and applies chemicals and fertilizers with exceptional accuracy. Over the long term, the rising population and elevated global demand for food and efficient water use will fuel demand for farm equipment.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Manufacturing - Farm Equipment industry is part of the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #22, which places it in the top 9% of more than 250 Zacks industries.
The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright prospects for the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic about this group's earnings growth potential. The Manufacturing - Farm Equipment industry's 2023 earnings estimates have improved 17% since the beginning of this year.
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.
Industry Underperform Sector and S&P 500
The Zacks Manufacturing - Farm Equipment industry has underperformed its sector and the Zacks S&P 500 composite over the past 12 months. Stocks in this industry have fallen 10.5% in the past 12 months against the S&P 500's growth of 6.8%. The Industrial Products sector has gained 0.3% in the said time frame.
Industry's Current Valuation
On the basis of the forward EV/EBITDA ratio, which is a commonly used multiple for valuing farm equipment stocks, we see that the industry is currently trading at 10.01X compared with the S&P 500's 10.70X. The Industrial Products sector's forward 12-month EV/EBITDA is 13.87X.
Over the last five years, the industry has traded as high as 24.75X and as low as 9.47X, the median being 13.72X.
4 Manufacturing - Farm Equipment Stocks to Keep an Eye On
Kubota: The company will continue to benefit from strong demand for agricultural equipment due to improving commodity prices. Demand for its construction equipment will be supported by increased infrastructure spending in the United States. Prospects look promising in other parts of the world as well. Kubota has formulated its long-term vision "GMB2030." It has been progressing with initiatives to realize smart agriculture with the aim of providing solutions that will improve the productivity and safety of food.
Agricultural machine automation is one of the key pillars of these initiatives. The company recently invested in Chouette, an AgTech company that uses artificial intelligence (AI) technology to analyze images captured by cameras to detect diseases and tree vigor and, based on the data analysis, creates the optimal spray volume of chemicals by unique algorithms.
Osaka, Japan-based Kubota manufactures and markets machinery and related solutions in the food, water and environment markets in Japan, North America, Europe, the rest of Asia, and internationally. The Zacks Consensus Estimate for the company's earnings for fiscal 2023 is pegged at $5.79, suggesting year-over-year growth of 15.6%. The estimate has moved up 5% in the past 60 days. The company has a trailing four-quarter earnings surprise of 12.7%, on average. The company has an estimated long-term earnings growth rate of 13% and currently sports a Zacks Rank #1 (Strong Buy).
You can see the complete list of today's Zacks #1 Rank stocks here.
Deere: The company is witnessing solid growth in order levels, which is expected to aid its top-line performance. DE will continue to benefit from its focus on launching products equipped with advanced technologies and features that provide it with a competitive edge. Efforts to expand in precision agriculture will be a significant growth driver. Replacement demand, triggered by the need to upgrade old equipment, will continue to support its revenues. Considering that Deere also makes construction equipment, it will benefit from strong demand in the residential and non-residential construction markets. DE's cost-control actions have been supporting margins despite the persistent inflationary pressures.
The Zacks Consensus Estimate for the Moline, IL-based company's fiscal 2023 earnings has moved up 1% over the past 60 days and is pegged at $33.96. The estimate implies year-over-year growth of 46%. DE has a trailing four-quarter earnings surprise of 15.4%, on average. Deere currently has an estimated long-term earnings growth rate of 12.1% and a Zacks Rank #2 (Buy).
Titan International: Farm commodity prices and the necessity to replace old equipment will support the agricultural segment's order levels. The earthmoving and construction end markets look promising, with increased infrastructure, an upbeat mining sector and ramped-up construction activities acting as the key catalysts. The company's margins will reflect improved production efficiencies stemming from management actions taken to improve profitability in the long term. Its continued cost reduction and cash preservation measures position it well for growth. TWI generated $61 million in free cash flow in the first half of fiscal 2023 — the highest first-half level reported in more than a decade.
West Chicago, IL-based Titan International is a leading global manufacturer of off-highway wheels, tires, assemblies and undercarriage products. The Zacks Consensus Estimate for the company's earnings for fiscal 2023 is pegged at $1.50 per share. It has a trailing four-quarter earnings surprise of 4%, on average. TWI currently carries a Zacks Rank #2.
AGCO Corp: The company has been gaining from improved farm dynamics and increasing replacement demand for old equipment. AGCO has been investing in products, precision farming technology and smart farming solutions to improve distribution and enhance digital capabilities to strengthen product offerings. These efforts, along with favorable market demand and the company's cost-control measures, have driven margin expansion across all regions over the past few quarters.
The Zacks Consensus Estimate for the company's fiscal 2023 earnings is pegged at $15.35, suggesting year-over-year growth of 23.6%. The consensus mark has moved up 2% over the past 60 days. AGCO Corp has a trailing four-quarter earnings surprise of 16.4%, on average. The company has an estimated long-term earnings growth rate of 5.8%. This Duluth, GA-based leading manufacturer and distributor of agricultural equipment and related replacement parts currently carries a Zacks Rank #3 (Hold).
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Deere & Company (DE) : Free Stock Analysis Report
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Kubota Corp. (KUBTY) : Free Stock Analysis Report
