Few stocks are better indicators of economic growth than Caterpillar Inc. (NYSE: CAT). With strong international diversification and sensitivity to economic cycles, the company is closely watched by fund managers and analysts alike for clues about the trajectory of the country's gross domestic product and corporate earnings in general. In other words, Caterpillar's performance is a pretty accurate predictor of how the economy is doing.
So when Caterpillar posted weak third-quarter results that fell short of expectations, it was a clear signal that the global economy and industrial demand is slowing.
But in spite of these macro headwinds, it doesn't mean it's time to abandon the industrial stocks altogether. In fact, one of Caterpillar's industrial equipment cohorts is bucking the bearish trend, looking much less susceptible to a slowdown in the global economy as share price and estimates continue to rise.
Take a look at the chart below and see how my favorite industrial-equipment stock has sharply outperformed Caterpillar in 2012.
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The company in question is AGCO Corp. (Nasdaq: AGCO), a farming-equipment specialist with a market cap of just $4.8 billion. In spite of a relatively weak global economy, AGCO has had a great year. The company has beat expectations in each of the past four quarters, completed a major acquisition to expand its product line and seen estimates steadily rise. These strong fundamentals have lifted AGCO's share price to a 10% gain this year, handily outperforming industrial-bellwether Caterpillar as investors take note of the up-and-coming mid-cap.
But looking forward, this burst of short-term strength in a weak economy is merely a reflection of a bigger story. With the bullish trend in agriculture well in play, AGCO is making some very strategic moves to capitalize on this big opportunity.
AGCO's core business is in mid- and small-size tractors. This is a little bit different than a company like Deere & Co. (NYSE: DE), for instance, which operates across a wider spectrum of the tractor market with an emphasis in large machines and combines. But late last year, AGCO completed a $934 million acquisition of GSI, a global leader in grain storage and protein production systems. With sales of $700 million in 2011, GSI significantly increased AGCO's sales and market cap. It also provided AGCO with access to new markets, customers and opportunities to cash in on growing agriculture demand.
But in spite of this emphasis on product diversification, AGCO remains focused on growing its core business in tractors. In September, the company celebrated the completion and opening of a new $350 million manufacturing plant in Germany, and launched a new line of mid-size tractors under its high-end subsidiary Fendt. Both initiatives are intended to support additional sales and production in Western Europe, an important international grain hub.