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 due to a growing population.
Industry giants like Deere DE, 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 automate farming is expected to be a major catalyst. Companies like Deere, CNH Industrial CNH, Kubota KUBTY 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 Kubota are presently the top three global agricultural equipment manufacturers (in that order).
Trends Shaping the Future of the Manufacturing - Farm Equipment Industry
Low Commodity Prices Act as Woes: Soybean prices have decreased 25.3% so far in 2024 and corn prices have declined 5.8%. Deteriorating agricultural commodity prices, high interest rates and production costs have affected farmer sentiment. This, in turn, is weighing on agricultural equipment demand. The USDA currently projects a net farm income of $140.7 billion for 2024, indicating a decline of 4.1% from that reported in 2023. Low farm income will continue influencing 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 delivery lead times.
Need for Food to Drive Industry Demand: Despite the ongoing weakness, agricultural equipment demand will be supported by increased global demand for food 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, seeing 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 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 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, CNHI and AGCO are currently the forerunners in this. CNH is developing industry-leading products in automation, autonomy, digital, alternative fuels and electrification to strengthen its position in the Precision Technology space. The company intends to launch its operating system — Life — which would enable it to meet evolving customer needs and deliver innovations.
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 #225, which places it at the bottom 10% 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 estimates for the current year have moved down 20.2%.
Despite the bleak near-term prospects of the industry, we present a few Manufacturing - Farm Equipment stocks that can be retained in your portfolio. It is worth taking a look at the industry’s stock market performance and valuation picture before that.
Industry Vs 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 gained 9% in the past 12 months compared with the S&P 500’s growth of 30.2%. The Industrial Products sector has rallied 17.3% in the said time frame.
One-Year Price Performance
Industry's Current Valuation
On the basis of the trailing 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 17.39X compared with the S&P 500’s 18.95X. The Industrial Products sector’s trailing 12-month EV/EBITDA is 17.57X. This is shown in the charts below.
Enterprise Value/EBITDA (EV/EBITDA) Ratio (TTM)
Enterprise Value/EBITDA (EV/EBITDA) Ratio (TTM)
Over the last five years, the industry traded as high as 28.72X and as low as 11.60X, the median being 18.35X.
3 Manufacturing - Farm Equipment Stocks to Keep an Eye on
Deere: The company has been witnessing solid growth in order levels, which is expected to aid its top-line performance. Replacement demand, triggered by the need to upgrade old equipment, will continue to support its revenues. DE will continue to benefit from its focus on launching products with advanced technologies and features that provide a competitive edge. Efforts to expand precision agriculture will be a significant growth driver. 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 2025 earnings is pegged at $19.51. DE has a trailing four-quarter earnings surprise of 13.5%, on average. Deere has an estimated long-term earnings growth rate of 12% and a Zacks Rank #3 (Hold) at present.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price & Consensus: DE
AGCO: 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 and the company’s cost-control measures have driven margin expansion over the past few quarters. AGCO is focusing on strategic transformation. It intends to streamline and focus its portfolio of agricultural machinery and precision agriculture technology solutions. In line with this, it has formed PTx, which integrates the precision agriculture technology from AGCO's tech stack's pillars, Precision Planting and its most recent joint venture, PTx Trimble. This move will facilitate AGCO’s rapid growth in technology transformation and provide seamlessly compatible, powerfully simple precision ag solutions.
The Zacks Consensus Estimate for the company’s 2024 earnings is pegged at $7.36. It has an estimated long-term earnings growth rate of 24%. This Duluth, GA-based company currently carries a Zacks Rank #3.
Price & Consensus: AGCO
Lindsay: In June 2024, the company 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 s. The project is valued at more than $100 million in revenues. The partnership demonstrates Lindsay’s ability to carry out large-scale and complicated projects that meet the crucial demands of its customers. It also shows the company's ability to raise food output, conserve limited water resources and improve quality of life. LNN is also well-poised to gain from demand for its Road Zipper System. The system is a highly differentiated product that addresses 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 their faster implementation and lower costs than constructing lanes.
The Zacks Consensus Estimate for the Omaha, NE-based company’s fiscal 2025 earnings has moved up 3% over the past 60 days. LNN has a trailing four-quarter earnings surprise of 10.3%, on average. It currently carries a Zacks Rank #3.
Price & Consensus: LNN
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