Despite weak commodity prices and high costs adversely impacting the near-term outlook of the Zacks Manufacturing - Farm Equipment industry, it will gain from sustained demand for agricultural equipment required to feed a growing population.
Major players like Deere DE, Kubota KUBTY, AGCO Corporation AGCO and Lindsay LNN are well-poised to benefit from this demand by expanding their product offerings. The industry's emphasis on revolutionizing agriculture with technology to make farming automated is 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 companies in the industry 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 in the industry also 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
Low Commodity Prices Act as a Woe: Soybeans' prices have decreased 9.5% so far in 2024 and corn prices have declined 14.2%. Deteriorating agricultural commodity prices, high interest rates and production costs have affected farmer sentiment. This, in turn, is weighing on agricultural equipment demand. Wheat, corn and soybean prices are likely to decline due to high inventory levels and expectations of an increase in supply. Also. demand in China for soybeans is expected to go down due to the government's efforts to reduce and substitute the use of soybeans in animal feed to decrease reliance on imports. The U.S. Department of Agriculture projects a net farm income of $116.1 billion for 2024, indicating a decline of 25.5% from 2023. Low farm income will continue to influence farmers' investment decision-making until conditions stabilize.
High Costs & Supply-Chain Issues Are Worrisome: 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 have led to higher lead times for deliveries.
Need for Food to Drive Demand for the Industry: Despite the volatility in commodity prices, agricultural equipment demand will be supported by increased global demand for food stemming from population growth and an increasing proportion of the population aspiring for better living standards. In the United States, the agricultural machinery market is forecast to reach $39.56 billion in 2024. It is expected to reach $53.7 billion in 2027 at a compound annual growth rate (CAGR) of 6.3% between 2024 and 2027. 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.
Technologically Advanced Machinery Continues to Gain Popularity: 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. Precision agriculture technology is expected to be a key catalyst, as it enables farmers to increase yield with reduced input costs and sustainability benefits. Deere, CNH 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 CNH's portfolio of precision agriculture technology offerings and accelerated the development of advanced machine automation and autonomous agriculture technology. In 2023 the company acquired global satellite navigation technology leader Hemisphere, boosting its in-house precision, automation and autonomy technology.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Manufacturing - Farm Equipment industry is part of the broader Zacks Industrial Products sector. The industry currently carries a Zacks Industry Rank #232, which places it at the bottom 7% 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 dim prospects in 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 gradually losing confidence in this group's earnings growth potential. Since the beginning of this year, the industry's earnings estimate for the current year has gone down 8%.
Despite the bleak near-term prospects of the industry, we will present a few Manufacturing - Farm Equipment stocks that can be retained in one's portfolio. It is worth taking a look at the industry's stock market performance and valuation picture before that.
Industry Versus Broader Market
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 declined 15.2% in the past 12 months against the S&P 500's growth of 29.8%. The Industrial Products sector has gained 10.5% in the said time frame.
One-Year Price Performance
Industry's Current Valuation
On the basis of the trailing EV/EBITDA ratio, which is a commonly used multiple for valuing farm equipment stocks, we see that the industry is currently trading at 13.48X compared with the S&P 500's 20.09X. The Industrial Products sector's trailing 12-month EV/EBITDA is 16.14X. This is shown in the charts below.
Enterprise Value/EBITDA (EV/EBITDA) Ratio
Enterprise Value/EBITDA (EV/EBITDA) Ratio
Over the last five years, the industry traded as high as 28.72X and as low as 11.16X, the median being 18.35X.
4 Manufacturing - Farm Equipment Stocks to Keep an Eye on
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 2024 earnings is pegged at $25.59. DE has a trailing four-quarter earnings surprise of 16%, on average. Deere has an estimated long-term earnings growth rate of 9.7% and carries a Zacks Rank #3.
Price & Consensus: DE
Kubota: The company 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 has invested in Chouette — an AgTech company that uses artificial intelligence 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. The company will continue to benefit from strong demand for its agricultural equipment. Demand for its construction equipment will be supported by increased infrastructure spending in the United States. Its prospects look promising in other parts of the world.
The Zacks Consensus Estimate for Osaka, Japan-based Kubota's earnings for fiscal 2024 is pegged at $6.21. The company has a trailing four-quarter earnings surprise of 48.3%, on average. It has an estimated long-term earnings growth rate of 2.9% and currently carries a Zacks Rank #3 (Hold).
Price & Consensus: KUBTY
AGCO Corp: The company has been gaining from improved farm dynamics and increasing replacement demand for old equipment. It 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 that it is restructuring its dealership network in Ohio. This will allow skilled dealers to broaden access to the manufacturer's popular brands across the Buckeye State. The dealerships plan to offer AGCO's whole brand portfolio, which includes Fendt, Massey Ferguson and PTx equipment and services. Lowe & Young, Mayer Farm Equipment and North Star Hardware & Implement are all current AGCO dealers in Ohio. They will broaden their product and service offerings in their current markets.
The Zacks Consensus Estimate for the company's fiscal 2024 earnings is pegged at $11.64. AGCO has a trailing four-quarter earnings surprise of 7.7%, on average. It has an estimated long-term earnings growth rate of 13.4%. This Duluth, GA-based company currently carries a Zacks Rank #3.
Price & Consensus: AGCO
Lindsay: The company is well poised to gain from its demand for its Road Zipper System. Its Road Zipper System is a highly differentiated product that delivers significant advantages by addressing key infrastructure needs such as reducing congestion, lowering carbon emission, improving commuter travel time and increasing driver safety. Road Zipper Systems are gaining popularity globally for its faster implementation and lower cost compared to constructing new lanes. Lindsay's infrastructure business is beginning to benefit from rising infrastructure spending in the United States, particularly in Road Zipper System leasing and the sale of road safety equipment. The company recently signed a multi-year supply agreement to provide Zimmatic irrigation systems and FieldNET remote management and scheduling technology in the Middle East and North Africa region. The project is valued at more than $100 million in revenues. Pivot shipments for this project will commence in fourth-quarter fiscal 2024 and are scheduled to continue until 2025.
The Zacks Consensus Estimate for the Omaha, NE-based company's ongoing-year earnings is pegged at $5.47. LNN has a trailing four-quarter earnings surprise of 19.9%, on average. It currently carries a Zacks Rank #3.
Price & Consensus: LNN
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