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Harvesting Through The Tough Season - Three Farm Equipment Stocks In Perspective
Posted by: Vanina Egea (IP Logged)
Date: September 2, 2013 10:29AM
In august, the Association of Equipment Manufacturers (AEM) published the mid-year review for the agricultural sector. Their findings point to a slowdown for the industry, highlighting a 9.5% decline on exports through the first half of 2013. Also, late soybean planting in the USA is expected to compound the industry’s slowdown. So, what are the prospects for AGCO (AGCO), CNH Global (CNH), and Deere & Co. (DE) under such conditions?
Size, efficiency, diversity
CNH is the smallest of the three, and continues to grow international presence. For example, the firm bought 25% of India’s TAFE, graving an important share of the tractors market. Additionally, returns in capital continue to improve through a business strategy based on internal profitability and working capital investments.
Future growth for AGCO remains in the international arena, in the Asian region specifically. Because, sale volumes in the US, South America, and Europe are expected to dwindle after five years of continued increments.
So, the focus has been shifted to the under exploited farmlands of Central Asia, Africa, and China. Also, new facilities are expected to be inaugurating in China and Africa, coupled with upgrades to US installations. However, future prospects are limited by import policy instability in the new markets.
Financially, AGCO is a solid company, and expected to improve once capacity expansions at German facility are fully integrated. However, I remain bearish about this stock, especially when the positions of most hedge funds remain small.
The mid-size cap CNH Global is the fruit of a merger between Case and New Holland. However, the resulting company continues to face an intense competition, especially in the North American market. The good news is that profits were reported since its inception in 1999.
Growth for CNH Global will stalled as opportunities in the Latin American margin reach exhaustion. Prospects are aggravated by smaller exports rates to the region. Most importantly, the US division is expecting a 20% reduction in sales.
Prospects for the construction segment are no better. The dropping off of heavy equipment manufacturing in North America and other unprofitable segments are telling evidence.
The balance sheet for CNH Global shows a troubled company. Debt continues to rise as cash volumes are diminished, and margins do not improve. Management expects the situation to change once integration between Case and New Holland is fine-tuned.
I remain bearish about CNH because of financial risks and current unfavorable economic environment. Additionally, long time stockholder Mario Gabelli continues to reduce his position.
Deere & Co. is the largest farm equipment manufacturer with a market cap of $32 mil. The company is present worldwide, but the US market remains the most important. The firm operates in three segments: agriculture (80%), construction (14%), and financial (5%), and declines in the construction segment are expected to continue.
The challenge ahead for Deere & Co. is to continue a business model based on margins and profitability improvements. More, opportunities for growth lie in developing markets where the firm holds small market positions –India, China, Russia, and Brazil
In India for example, products are yet to be adjusted to local needs, and market share remains below 15%. Also, sales in North and South America, management projects, will grow 5% and 20% each . In line, the firm projects a 7% increment in total sales for 2013, offsetting the lagging construction segment. Prospects are reinforced by expected record farm income levels in the US and high commodity prices worldwide.
Currently, I feel bullish about Deere & Co. because high commodity prices, greater planted area, and developing markets offer great opportunities for growth. Additionally, revenue sources continue to diversify and Warren Buffett turned into the largest stockholder in less than a year.
I prefer Deere & Co. over AGCO and CNH Global because the company holds true growth potential, without any downside. Additionally, Deere & Co. holds a dominant position in the most relevant markets for the industry. And, the US market provides the company with the necessary backing to continue incrementing international footprint.
Disclosure: VaninaEgea has no position in any stocks mentioned
Guru Discussed: Mario Gabelli: Current Portfolio, Stock Picks
Stocks Discussed: AGCO, CNH, DE,