I wanted to revisit several articles I wrote regarding weakness in the used farming equipment industry. I wrote about how I sold John Deere (DE, Financial), Case (CNHI, Financial) and Agco (AGCO, Financial). Together, these three manufacturers control 90% of the tractor market in the United States. My research still sells "sell" but the stock prices have not taken my advice.
The premise is that farmers can go to auction and buy slightly used tractors and combines for about half off. Usage is measured in hours. I use a simple rule of thumb to equate to used cars: take hours times two and add a zero. So if a tractor has 600 hours, it is about like a car with 12,000 miles. I was looking at the heavy equipment auction house Ritchie Brothers (RB).
Once again, I see tractors selling for half off. A 2014 Case 7230 combine with only 625 hours recently sold in Columbus, Ohio, for $175,000. There were several similar models, which looks as if a large farmer in the area wanted to unload. A similar combine is selling at a dealership in Nevada, Missouri, for $289,000. I am guessing new this combine would sell for about $325,000, close to double what it sold for in Columbus.
Moving on, at the same auction, a John Deere S660 combine with 672 hours sold for $165,000. I see one selling for $329,000 in Tappahannock, Virginia. So again, about half off.
Perhaps it was a weak auction in Columbus. Maybe everyone was gearing up for a big Ohio State football game. Let's look at another country and see if the phenomenon still exists. It does. A John Deere S670 in Canada with 1,300 hours went for $163,130. The weak Canadian dollar did not help it. If you wanted to get into farming, now is the time. You can buy a nice combine for $60,000.
Deere's stock has done quite well since my first article. The company predicts fiscal 2017 sales to be down only 1%, compared to fiscal 2016 which were down 6%. It is also bullish on Brazil and Latin America. I have not looked at auctions down there but am suspicious.
I am surprised that sales have not taken a bigger hit. According to Agrimoney, " U.S. sales of four-wheel drive tractors, used by arable growers, fell 32% by volume in the first nine months of the year, with combine volumes down by 24%, according to the Association of Equipment Manufacturers." Still, I am surprised by how many people are bullish on tractor stocks. Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) did sell out of Deere.
How would you have liked to have bought tractor tire manufacturer Titan International (TWI, Financial) earlier this year for $2.50? It is now $12.
I still would avoid the three big tractor stocks. I do not see why they should be trading at such high levels when the bottom has fallen out of the used market. Would you buy a new Porsche when the same car with 10,000 miles on it was selling for half off? I do not think so. I would avoid the stocks too.
Disclosure: We do not own shares.
Start a free 7-day trial of Premium Membership to GuruFocus.
