The Zacks Manufacturing – Farm Equipment industry benefited from higher agricultural commodity prices. This, in turn, increases farm incomes and encourages farmers to invest more in farm equipment.
Building on this momentum, some leading industry players such as Titan International, Inc. , Deere & Company and AGCO Company invest in new agricultural products with advanced technology to make farming automated, easier and more precise throughout the production process. However, supply chain disruptions and inflationary costs remain near-term concerns.
Supply risk fuels commodity prices, demand for equipment is high
Russia’s invasion of Ukraine has created uncertainty in the global economy. Being the largest grain exporters in the world, escalating tensions between these countries have fueled fears of impending grain supply disruptions. This pushes up the prices of agricultural raw materials. Prices for corn and soybeans, the most important grains for commercial agriculture, are rising. Corn prices have risen 33% year-on-year and currently stand at $742 a bushel amid supply issues and disruption to exports from the Black Sea region.
Soybeans are at $16 a bushel, up 15% year over year. Supply concerns stemming from Argentina’s decision to suspend export registrations of soybean oil, soybean meal and other related products, as well as drought conditions in southern crop belts -Americans, will support prices.
Despite limited government-sponsored funding programs, total U.S. crop cash receipts are likely to increase 5.1% year-over-year in calendar year 2022 due to higher commodity prices, according to the US Department of Agriculture. In fact, US customer confidence has improved in recent quarters with strong exports to China.
High commodity prices bode well for demand for agricultural equipment. Apart from that, the need to replace aging equipment will continue to drive growth.
Investment in the advancement of agricultural technology
Customers are increasingly relying on advanced technology, smart farming solutions and mechanization to run their operations. Thus, companies in the industry are focusing on launching products with advanced technologies and features to keep up with changing customer demands. Initiatives to develop precision agriculture technology will be a game-changer for the industry, given its benefits in terms of improved productivity and sustainability. Demand continues to grow for popular features including automatic field guidance machines and equipment that plant seeds and apply chemicals and fertilizers with exceptional precision. In the long term, increasing population and high global demand for food and efficient water use will fuel the demand for industry equipment.
Pricing actions to offset cost inflation and supply chain issues
Industry players are facing a tight supply chain and rising raw material costs, especially steel, as well as rising transportation costs. Labor shortages could also affect their production levels, compromising their ability to meet demand. However, these headwinds are expected to ease as the year progresses. At the same time, players in the sector are implementing actions to strengthen their financial situation, reserve cash and improve their profitability. In addition, cost control actions are likely to help protect margins.
The Zacks Manufacturing – Farm Equipment industry has outperformed the industrials sector and the S&P 500 for the past six months. Shares in this industry rose 21.5% against the 1.4% growth in the Zacks Industrials sector and the 6.7% rise in the S&P 500.
Image source: Zacks Investment Research
3 Crafting – Farm Equipment Stocks Worth Betting On
We have selected three stocks of agricultural equipment carrying a Zacks rank of No. 1 (strong buy) or 2 (buy). These stocks have positive earnings growth projections for the current year and have also been subject to upward revisions of late.
Titan International: Based in Quincy, Illinois, the company is one of the world’s leading manufacturers of off-road wheels, tires, assemblies and undercarriages. Titan’s agriculture segment is benefiting from strong demand in all geographic markets and rising agricultural commodity prices. The recovery in construction markets drove the performance of the company’s Earthmoving/Construction segment. Titan will also benefit from the implementation of pricing actions to mitigate escalating raw material, labor and logistics costs.
Zacks’ consensus estimate for the company’s current-year earnings has been revised up 23% in the past 60 days to $1.16 per share. The estimate also suggests a year-over-year increase of 36.5%. Shares of TWI have soared 103.8% in six months. It managed a 47.6% surprise on average earnings for the last four quarters and currently has a Zacks ranking of 1. You can see the full list of today’s Zacks #1 Rank stocks here.
Deere & Company: Based in Moline, Illinois, Deere is the world’s largest producer of agricultural equipment. The company is well positioned to benefit from the growing demand for agricultural equipment, driven by rising agricultural commodity prices. In addition, improving scenario in the construction and forestry sector and investments in precision agriculture will support the growth. Efforts to reduce operating costs will improve margins.
Zacks’ consensus estimate for the company’s fiscal 2022 earnings has been revised up 2.3% in the past 60 days to $22.73. The estimate also suggests a 19.7% year-over-year jump. Shares of the company have gained 21.4% over the past six months. It pulled in a 20.6% surprise on average earnings for the last four quarters and currently carries a No. 2 Zacks rank.
AGCO Corporation: Based in Duluth, Georgia, AGCO is a leading manufacturer and marketer of agricultural equipment and related replacement parts. The company’s outstanding sales volume, robust end-market demand and positive pricing should deliver impressive results for the current year. Rising replacement demand for aging fleets will also boost its revenue. AGCO continues to invest in premium technologies and smart farming solutions to strengthen its product offerings. In addition, cost control measures in response to material cost inflation will likely boost margins.
Zacks’ consensus estimate for the company’s current year earnings is currently pegged at $11.63, suggesting a 12% year-over-year increase. The consensus mark has moved 10.6% north over the past 60 days. The stock is up 16.3% over the past six months. The company currently has a Zacks ranking of 2 and has achieved a four-quarter earnings surprise of 56.6% on average.