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Zacks Industry Outlook Highlights Deere, AGCO and Titan International

For Immediate Release

Chicago, IL – December 5, 2022 – Today, Zacks Equity Research discusses Deere & Co. DE, AGCO Corp. AGCO and Titan International, Inc. TWI.

Industry: Farm Equipment

Link: https://www.zacks.com/commentary/2024576/3-farm-equipment-stocks-to-watch-in-a-flourishing-industry

The Zacks Manufacturing - Farm Equipment industry is set to benefit from upbeat commodity prices, which would boost farm income. This, in turn, would lead to higher spending on agricultural equipment that should support the industry in the days ahead. The industry’s focus on revolutionizing agriculture with technology in an effort to make farming automated, easy to use and more precise across the production process is also likely to aid growth.

Players like Deere & Co., AGCO Corp. and Titan International, Inc. are well-poised to gain from their efforts to bring technologically advanced products to the market and cost-control efforts.

About the Industry

The Zacks Manufacturing - Farm Equipment industry comprises companies that manufacture agricultural equipment. These include tractors, combines, cotton pickers, 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

Improving Farm Income Bodes Well: The USDA (U.S. Department of Agriculture) projects net farm income at $160.5 billion for 2022 — the highest since 1973 and indicating a 13.8% year-over-year increase. Cash receipts from the sale of agricultural commodities are expected to rise 24.3% year over year. Crop receipts for soybeans are expected to be up 19% in 2022 from the prior-year levels, backed by solid gains in soybeans, corn and wheat.

Corn and soybean prices are expected to remain strong next year as well. Given that these are the most important grains for cash crop farming, this will likely translate into improved order levels. High commodity prices will drive farm income and enable farmers to continue spending on agricultural equipment. Apart from this, the need to replace aging equipment will sustain demand.

High Costs & Supply Chain Woes Remain: Farmers have been witnessing higher production costs, particularly of fertilizers. This might impede their purchasing power if commodity prices decline. The industry is also facing raw material 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.

Labor shortage might affect their production levels and impair their ability to meet demand. Consequently, the industry players are making every effort to bolster their financial condition, conserve cash and improve profitability. The companies have been implementing cost-reduction actions, which are likely to help sustain margins in the current scenario.

Advancement in Latest Technology: 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 expand in 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, rising population and elevated global demand for food and efficient water use will fuel demand for the industry’s 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 #97, which places it at the top 39% 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 2022 earnings estimates have improved 3% so far 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 Outperforms Sector and S&P 500

The Zacks Manufacturing - Farm Equipment industry has outperformed its own sector and the Zacks S&P 500 composite over the past 12 months. Stocks in this industry have gained 24% in the past 12 months compared with the S&P 500’s decline of 12.4%. The Industrial Products sector has declined 8.5% in the said time frame.

Industry's Current Valuation

On the basis of the 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 11.72X compared with the S&P 500’s 10.89X. The Industrial Products sector’s forward 12-month EV/EBITDA is 15.84X.

Over the last five years, the industry has traded as high as 24.75X and as low as 10.02X, with the median being at 11.72X.

3 Manufacturing - Farm Equipment Stocks to Keep an Eye On

Deere: The company 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. Deere, the world’s largest producer of agricultural equipment, is well-poised to benefit from improving agricultural commodity prices.

Replacement demand triggered by the need to upgrade old equipment will continue to support its revenues. Considering that it also makes construction equipment, it will benefit from strong demand in the residential and non-residential construction markets. Its cost-control actions have been supporting margins despite the persistent inflationary pressures, leading to its 26% share over the past year.

The Zacks Consensus Estimate for the Moline, IL-based company’s fiscal 2023 earnings has moved up 3% over the past 30 days and is currently pegged at $27.28. The estimate implies year-over-year growth of 17.2%. DE has a trailing four-quarter earnings surprise of 29.3%, on average. Deere has an estimated long-term earnings growth rate of 11.9% and currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

AGCO: The company has been gaining from improved farm dynamics and increasing replacement demand for old equipment. AGCO continues to invest 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 its cost-control measures, have driven margin expansion across all regions over the past few quarters. Backed by these tailwinds, the stock has gained 16% in the past year.

The Zacks Consensus Estimate for the company’s fiscal 2022 earnings currently stands at $11.85 and suggests growth of 14.2% year over year. This Duluth, GA-based leading manufacturer and distributor of agricultural equipment and related replacement parts currently carries a Zacks Rank of 2. AGCO has a trailing four-quarter earnings surprise of 29.3%, on average. The company has an estimated long-term earnings growth rate of 9.6%.

Titan International: Both of the company’s agriculture and earthmoving construction segments have been witnessing strong sales volume growth over the past few quarters, which has been instrumental in its share price gain of 111% in the past year. Farm commodity prices and the necessity to replace old equipment continue to support improved order levels for the agricultural segment.

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 segment’s margins have been reflecting improved production efficiencies stemming from management actions taken to improve profitability for the long term. Its continued cost reduction and cash preservation measures position it well for growth.

The Zacks Consensus Estimate for the company’s earnings for fiscal 2022 currently stands at $2.22 per share, suggesting a year-over-year improvement of 161.2%. The estimate has moved up 1.8% over the last 30 days. It has a trailing four-quarter earnings surprise of 49.6%, on average. TWI currently carries a Zacks Rank #3 (Hold).

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.

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Deere & Company (DE) : Free Stock Analysis Report

AGCO Corporation (AGCO) : Free Stock Analysis Report

Titan International, Inc. (TWI) : Free Stock Analysis Report

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