Zacks Industry Outlook Highlights Deere & Co, AGCO Alamo Group, Titan International and CNH Industrial
For Immediate Release
Chicago, IL – November 21, 2023 – Today, Zacks Equity Research discusses Deere & Co. DE, AGCO Corp. AGCO, Alamo Group ALG, Titan International TWI and CNH Industrial CNHI.
Industry: Farm Equipment
Link: https://www.zacks.com/commentary/2186590/4-farm-equipment-stocks-in-focus-on-strong-industry-trends
The Zacks Manufacturing - Farm Equipment industry is set to benefit from increased agricultural equipment demand to meet the food requirements of a growing population. Deere & Co., AGCO Corp., Alamo Group and Titan International are well-poised to capitalize on this demand, backed by their efforts to grow their product offerings.
Focus on revolutionizing agriculture with technology to make farming automated, easy to use and more precise across the production process is also expected to be a major catalyst. Companies like Deere, CNH Industrial and AGCO are thus investing heavily in upping their technology game.
About the Industry
The Zacks Manufacturing - Farm Equipment industry comprises companies that manufacture agricultural equipment. These equipment 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 the companies in the industry also 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. Deere, CNH Industrial and AGCO presently hold the foremost positions as the top three global manufacturers of agricultural equipment (in that order).
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, 22.8% lower than in 2022, mainly due to a decline in direct government payments. In inflation-adjusted 2023 dollars, net farm income is forecast to decrease 25.4% in 2023. Despite the decline, income projections 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 at a compound annual growth rate (CAGR) of 3.3% over 2021-2027.
Pricing, Cost Cutting Actions to Boost Margins: The industry has not been immune to the rampant cost inflation prevailing in the sector. Constraints on the availability of raw materials, labor and trucking resources had led to higher lead times for deliveries. However industry players have recently been reporting improvements in the supply chain.
The companies have been implementing pricing and cost-reduction actions, which are likely to help sustain margins. For instance, CNHI delivered record margins in the third quarter of 2023 despite weak demand in some categories, courtesy of its aggressive cost-containment actions. The company has announced a new restructuring program to enhance operational efficiencies and optimize the organization. It expects a run rate reduction of 10-15% on total labor and non-labor SG&A expenses.
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. 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.
Precision agriculture technology is expected to be a key catalyst, as it enables farmers to increase yield with reduced input costs as well as sustainability benefits. Deere, CNHI and AGCO are currently the forerunners in this. CNH Industrial's acquisition of Raven Industries in November 2021 marked an important milestone in the company's digital transformation. It expanded CNHI's portfolio of precision agriculture technology offerings and accelerated the development of advanced machine automation and autonomous agriculture technology.
The company recently acquired global satellite navigation technology leader Hemisphere, boosting its in-house precision, automation and autonomy technology. CNHI is working toward its plan to reduce reliance on third parties and attain leadership in automation technology.
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 #65, which places it in the top 26% 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 14% 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 11.5% in the past 12 months against the S&P 500's growth of 14.9%. The Industrial Products sector has gained 3.5% 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 10.31X compared with the S&P 500's 10.64X. The Industrial Products sector's forward 12-month EV/EBITDA is 13.51X.
Over the last five years, the industry has traded as high as 24.75X and as low as 9.47X, the median being 13.67X.
4 Manufacturing - Farm Equipment Stocks to Keep an Eye On
Alamo: Customer demand has been strong in the company's end markets, which aided ALG in delivering record sales and earnings in the third quarter of 2023 and maintaining the trend of solid performances for eight straight quarters. Enhanced supply chain performance has also benefited sales, while efforts to improve efficiency and lower costs have led to margin expansion. Strong order levels in both Vegetation Management and Industrial Equipment segments bode well for solid performances in the quarters ahead.
Sales in the Vegetation Management Division have exhibited an impressive CAGR of 22% from 2020 to 2022, surpassing the 6.4% growth of the Industrial Equipment Division, backed by solid demand for its diverse product lines, which is expected to continue. The acquisition of Timberwolf in October 2023 complements its existing range of tree care products and strengthens its presence in the U.K. and European forestry and tree care markets.
ALG also acquired Royal Truck & Equipment, a leading producer of specialized highway safety equipment, including crash attenuator trucks. This marks the company's foray into the highway safety equipment market, which has solid growth potential. The company's shares have gained 3% in the past six months.
The Zacks Consensus Estimate for the Seguin, TX-based company's ongoing-year earnings has been revised 4% upward in 90 days' time to $11.59 per share. The consensus mark implies year-over-year growth of around 34%. ALG has a trailing four-quarter earnings surprise of 19.9%, on average. It currently sports a Zacks Rank #1 (Strong Buy).
You can see the complete list of today's Zacks #1 Rank stocks here.
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.
The company's efforts to bring innovative products according to customers' evolving needs will continue to boost its top line. TWI's Low Sidewall Technology (LSW) wheel and tire assemblies have been gaining popularity since its introduction among farmers due to fuel efficiency and higher yield. Its strong balance sheet supports debt repayment and share repurchases while making investments in organic growth or highly selective acquisitions. Backed by these tailwinds, TWI shares have gained 23% in the past six months.
The Zacks Consensus Estimate for the West Chicago, IL-based company's earnings for fiscal 2023 is pegged at $1.54 per share. The estimate has moved up 2.7% over the past 90 days. It has a trailing four-quarter earnings surprise of 3.34%, on average. TWI currently carries a Zacks Rank #2 (Buy).
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 company's shares have gained 7% in the past six months.
The Zacks Consensus Estimate for the Moline, IL-based company's fiscal 2023 earnings has moved up 4% over the past 90 days and is pegged at $33.89. 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 #3 (Hold).
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 over the past few quarters.
AGCO recently announced a transformational joint venture with Trimble, which creates an industry-leading global mixed-fleet precision agricultural platform. This is AGCO's largest agricultural tech deal in its history. The company also signed an agreement to acquire digital assets from Germany-based FarmFacts GmbH that will add to its precision agriculture capabilities. AGCO shares have gained 3% in the past six months.
The Zacks Consensus Estimate for the company's fiscal 2023 earnings is pegged at $15.66, suggesting year-over-year growth of 26%. The consensus mark has moved up 4% over the past 90 days. AGCO has a trailing four-quarter earnings surprise of 16.4%, on average. The company has an estimated long-term earnings growth rate of 21.1%. This Duluth, GA-based company currently carries a Zacks Rank #3.
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Deere & Company (DE) : Free Stock Analysis Report
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Titan International, Inc. (TWI): Free Stock Analysis Report
Alamo Group, Inc. (ALG) : Free Stock Analysis Report
CNH Industrial N.V. (CNHI) : Free Stock Analysis Report
