With the continued recovery from the coronavirus pandemic increasing consumer demand, and geopolitical events and weather impacting supply of key agricultural goods, should you consider agricultural equipment stocks carrying momentum into 2022?
Agriculture Recent News
The powered agriculture equipment market encompasses a wide array of products such as tractors, combines, planters, sprayers and other equipment performing tilling, haymaking and baling functions. The growth of the powered agriculture equipment market has been extensive. However, a significant share of the population is unaware of the numerable benefits of this equipment, and the extent of government support to the agriculture industry. In the past two decades, next-generation agriculture techniques and technologies have also been adopted by farmers across the globe to increase crop yield and soil fertility, shrink wastage and ensure food security.
The agricultural equipment industry is coming off a strong year in 2021 as it continues to recover from the pandemic. This growth was led by large increases in the production of tractors and combines in North America. In 2021, tractor production grew 20% while combine production grew 7%. A major driver of the agricultural markets and equipment sales is the financial position of the farmer at the end of the year. The good news is that commodity prices have been very favorable over the past few years, providing farmers with more cash and a higher propensity to spend sooner rather than later.
The agricultural equipment industry hasn’t been immune to the global semiconductor shortages. This issue will likely continue through 2022 and potentially longer. While global supply chain issues are slowing growth, they aren’t completely hindering it.
Current global uncertainties have the possibility to affect agricultural trade in 2022. Russia’s invasion of Ukraine could impact the agriculture industry. Russia and Ukraine are vital to the world’s food supply. Together the two countries account for almost a quarter of global grain exports. Global agricultural prices were already at an all-time high amid the coronavirus pandemic and climate change, and the war is expected to send prices for many crops soaring. AGCO recently announced that it has suspended the sale of new machinery in Russia and Belarus. Deere & Co. and CNH Industrial have suspended shipments to both Russia and Belarus. Russia and Ukraine account for about 3% of Deere & Co.’s annual sales. Earnings estimates for all three companies have decreased as a result of the conflict.
Despite this, USDA chief economist Seth Meyer believes 2022 will be a record year for the agriculture industry. Meyer forecasts U.S. agricultural trade exports to be $183.5 billion this year, or an increase of over $11.3 billion from 2021. Furthermore, the worldwide value of the market for agricultural equipment is projected to reach $139.6 billion by 2026, up from $115.3 billion in 2020, a compound annual growth rate (CAGR) of 3.2% from 2021 to 2026.
Grading Agricultural Equipment Stocks With AAII’s A+ Stock Grades
When analyzing a company, it is helpful to have an objective framework that allows you to compare companies in the same way. This is one reason why AAII created the A+ Stock Grades, which evaluate companies across five factors that have been shown to identify market-beating stocks in the long run: value, growth, momentum, earnings estimate revisions (and surprises) and quality.
Using AAII’s A+ Stock Grades, the following table summarizes the attractiveness of three agricultural equipment stocks—AGCO, CNH Industrial and Deere & Co.—based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Agricultural Equipment Stocks
What the A+ Stock Grades Reveal
AGCO (AGCO) is engaged in the manufacturing and distribution of agricultural equipment and related replacement parts throughout the world. It delivers agricultural solutions to farmers through a full line of tractors, combine harvesters, hay and forage equipment, seeding and tillage implements, grain storage and protein production systems, as well as replacement parts. Its brand products include AP, Cimbria, Cumberland, Fella, Fuse, Gleaner, GSI, Precision Planting, Sunflower, Tecno, White Planters, Grain & Protein, AGCO Genuinecare, AGCO Parts, AGCO Power, AGCO Protection, AGCO Service and AGCO Trader. The company’s tillage and seeding equipment joint venture operates within the North American geographical segment. Its grain storage and protein production systems operate within the Europe/Middle East geographical segment. The Chinese harvesting business operates within the Asia/Pacific/Africa segment.
A higher-quality stock possesses traits associated with upside potential and reduced downside risk. Backtesting of the quality grade shows that stocks with higher quality grades, on average, outperformed stocks with lower grades over the period from 1998 through 2019.
AGCO has a Quality Grade of A with a score of 84. The A+ Quality Grade is the percentile rank of the average of the percentile ranks of return on assets (ROA), return on invested capital (ROIC), gross profit to assets, buyback yield, change in total liabilities to assets, accruals to assets, Z double prime bankruptcy risk (Z) score and F-Score. The score is variable, meaning it can consider all eight measures or, should any of the eight measures not be valid, the valid remaining measures. To be assigned a quality score, though, stocks must have a valid (non-null) measure and corresponding ranking for at least four of the eight quality measures.
The company ranks strongly in terms of its return on assets and F-Score. AGCO has return on assets of 10.2% and an F-Score of 8. AGCO’s return on assets exceeds the industry average of 3.7% by a significant margin. The return on assets indicates how profitable a company is in relation to total assets. The higher the return on assets, the more efficient and productive a company is at managing its balance sheet to generate profits. The F-Score is a number between zero and nine that assesses the strength of a company’s financial position. It considers the profitability, leverage, liquidity and operating efficiency of a company. However, it ranks poorly in terms of its ratio of accruals to assets (net income minus cash divided by total assets), in the 14th percentile.
AGCO is held in the VMQ Stocks model portfolio. The company has a strong Momentum Grade of B with a score of 71, driven by strong relative price strength in first-quarter 2022 and for the weighted four quarters. AGCO also has a Value Score of 44, which is considered average. The company currently has a shareholder yield of 0.7%.
CNH Industrial N.V. (CNHI) is a global capital goods company. The company is engaged in the design, production, marketing, sale and financing of agricultural and construction equipment. One of its most recognizable brands, Case IH, has served farmers for generations. Its products are available through a robust dealer network, which includes over 3,600 dealer and distribution locations globally. CNH Industrial’s finance arm provides retail financing for equipment to its customers, in addition to wholesale financing for dealers. This increases the likelihood of product sales.
CNH Industrial has a Value Grade of B, based on its Value Score of 22, which is considered to be a good value.
CNH Industrial’s Value Score ranking is based on several traditional valuation metrics. The company has a score of 16 for the price-to-sales (P/S) ratio, 26 for shareholder yield and 16 for the price-to-free-cash-flow (P/FCF) ratio (remember, the lower the score the better for value). The company has a price-to-sales ratio of 0.64, a price-to-free-cash-flow ratio of 6.7 and a 1.8% shareholder yield. A lower price-to-sales ratio is considered better, and CNH Industrial’s price-to-sales ratio is well below the sector median of 1.57. The ratio of price to free cash flow (the lower the better) and shareholder yield are also significantly better than the sector median.
The Value Grade is the percentile rank of the average of the percentile ranks of the valuation metrics mentioned above along with the price-to-book-value (P/B), enterprise-value-to-EBITDA and price-earnings (P/E) ratios.
Earnings estimate revisions offer an indication of how analysts are viewing the short-term prospects of a firm. The company has an Earnings Estimate Revisions Grade of B, which is considered positive. The grade is based on the statistical significance of its last two quarterly earnings surprises and the percentage change in its consensus estimate for the current fiscal year over the past month and past three months.
The company reported a positive earnings surprise for fourth-quarter 2021 of 25.0%, and in the prior quarter reported a positive earnings surprise of 67.4%. Over the last three months, the consensus earnings estimate for the first quarter of 2022 has fallen 23.7% to $0.245 per share due to one upward and two downward revisions. This is due to potentially lower demand for equipment as a result of the Russia-Ukraine conflict.
The company has a strong Quality Grade of B based on an F-Score of 7, which is above the industry average. It also has strong changes in total liabilities to assets with a score of 75. CNH Industrial has a Momentum Score of 72, which is considered strong. It also has a current dividend yield of 2.0%, well above the industry average of 0.6%.
Deere (DE) produces intelligent, connected machines and applications that help the agriculture and construction industries. The company’s production and precision agriculture segment develops and delivers global equipment and technology solutions to unlock customer value for production-scale growers of large grains, small grains, cotton and sugar. The small agriculture and turf segment develops and delivers global equipment and technology solutions to unlock customer value for dairy and livestock producers, crop producers and turf and utility customers. The construction and forestry segment develops and delivers a range of machines and technology solutions organized along the earthmoving, forestry and roadbuilding production systems. The financial services segment primarily finances sales and leases by John Deere dealers of new and used equipment for production and precision agriculture, small agriculture and turf, as well as construction and forestry.
Deere has a Momentum Grade of A, based on its Momentum Score of 82. This means that it ranks in the top tier of all stocks in terms of its weighted relative strength over the last four quarters. This score is derived from a high relative price strength of 22.9% in the first quarter offset by moderately low relative price strengths of –3.4% and –15.5% in the second and fourth quarters, respectively. The scores are 89, 66, 68 and 32 sequentially from the first quarter. The weighted four-quarter relative price strength is 4.8%, which translates to a score of 82. The weighted four-quarter relative strength rank is the relative price change for each of the past four quarters, with the most recent quarterly price change given a weight of 40% and each of the three previous quarters given a weighting of 20%.
The company has a strong Quality Grade of B based on a buyback yield score of 87. Buyback yield is the repurchase of outstanding shares over the existing market cap of a company. It has a 1.9% buyback yield, which is above the industry average. It also has a strong return on assets with a score of 78. Its return on assets of 7.0% is nearly double the industry average.
Deere has a Value Grade of D, based on its Value Score of 66, which is considered expensive. This is based on a high price-to-book-value ratio of 7.13 and a high price-to-free-cash-flow ratio of 43.3. The company has an average Growth Grade of C, with a score of 56. It currently has a dividend yield of 1.0%.
The stocks meeting the criteria of the approach do not represent a “recommended” or “buy” list. It is important to perform due diligence.
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