In this article I use AAII’s A+ Investor Stock Grades to provide insight into three agricultural equipment stocks positioned for success in 2023. With continued recovery from the coronavirus pandemic increasing consumer demand and severe weather impacting the supply of key agricultural goods, should you consider these three agricultural equipment stocks of AGCO
AGCO
, Deere and Titan International
TWI
?
Agriculture Recent News
The powered agriculture equipment market encompasses a wide array of products such as tractors, combine harvesters, 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 innumerable benefits this equipment has and the extent of government support for 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 2022 as it continues to recover from the pandemic. According to the U.S. Department of Agriculture (USDA), 2022 was a record year for agricultural exports, totaling $196.4 billion. This was an increase of 11% compared to the previous year. The USDA confirmed that this increase stemmed from a sales increase in each of the top 10 U.S. agricultural export markets. The top commodities exported in 2022 included soybeans, corn, beef, dairy, cotton and tree nuts.
In a growing market, U.S. farms need to acquire new equipment and maintain existing machines. The companies featured in this article produce a range of agricultural equipment used on farms across the U.S. In a report published in January 2023, the International Market Analysis Research and Consulting (IMARC) Group found that the global farm equipment rental market size reached $52.4 billion in 2022. Analysts expect the industry to grow at a compound annual growth rate of 5.6% over the next five years.
With more equipment needed in the industry, equipment producers will benefit from increased demand. However, there are risks in the agricultural industry related to crop yields as the changing climate makes weather patterns unpredictable. In addition, more severe weather conditions plague the Midwest, where most of the farming occurs. According to the National Oceanic and Atmospheric Administration (NOAA), there were 55 preliminary tornado reports in February 2023. This is almost double the average from 1991–2010. As severe weather becomes more destructive and unpredictable, farmers are at risk of losing significant amounts of their crops.
USDA chief economist Seth Meyer believes 2023 will be slower than 2022 for the agriculture industry. Meyer forecasts U.S. agricultural trade exports to be $184.5 billion this year, a decrease of almost $12 billion from 2022. Furthermore, 2023 net cash farm income is forecast to decrease 22.9% from the record high set in 2022.
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, Deere & Co. and Titan International—based on their fundamentals.
AAII’s A+ Stock Grade Summary for Three Agricultural Equipment Stocks
What the A+ Stock Grades Reveal
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 a return on assets of 9.0% and an F-Score of 8. AGCO’s return on assets exceeds the sector median of 3.0% 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, the company ranks poorly in terms of its ratio of accruals to assets (net income minus cash divided by total assets), in the 24th percentile.
AGCO is held in the VMQ Stocks model portfolio. The company has an average Momentum Grade of C with a score of 54. AGCO also has a Value Score of 51, which is considered average. The company currently has a shareholder yield of 1.2%.
Deere 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 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 C, based on its Momentum Score of 53. This means that it ranks in the middle tier of all stocks in terms of its weighted relative strength over the last four quarters. This rank is derived from a high relative price strength of 12.1% and 28.6% in the second-most-recent and third-most-recent quarters, offset by low relative price strengths of –17.0% and –16.9% in the most recent and fourth-most-recent quarters, respectively. The ranks are 33, 78, 90 and 28 sequentially from the most recent quarter. The weighted four-quarter relative price strength is –2.0%, which translates to a rank of 53. 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 rank of 86. Buyback yield is the repurchase of outstanding shares over the existing market capitalization of a company. It has a 3.2% buyback yield, which is well above the sector median. It also has a strong return on assets with a rank of 86. Its return on assets of 9.3% is over triple the sector median.
Deere has a Value Grade of D, based on its Value Score of 39, which is considered expensive. This is based on a high price-to-book-value (P/B) ratio of 5.31 and a high price-to-free-cash-flow (P/FCF) ratio of 34.0. The company has a very strong Growth Grade of A, with a score of 85. It currently has a dividend yield of 1.3%.
Titan International is a global manufacturer of off-highway wheels, tires, assemblies and undercarriage products. Its segments include agricultural, earthmoving/construction and consumer. The agricultural segment manufactures wheels, tires and components for use on various agricultural equipment, including tractors, combines, skidders, plows, planters and irrigation equipment. The earthmoving/construction segment manufactures wheels, tires and undercarriage systems and components for various types of off-the-roads (OTR) earthmoving, mining, military, construction and forestry equipment, including skid steers, aerial lifts, cranes, graders and levelers, scrapers, self-propelled shovel loaders, articulated dump trucks, load transporters, haul trucks, backhoe loaders, crawler tractors, lattice cranes, shovels and hydraulic excavators.
Titan International has a Value Grade of A, based on its Value Score of 89 (a higher score being more attractive), which is considered to be deep value.
Titan International’s Value Score ranking is based on several traditional valuation metrics. The company has a rank of 42 for shareholder yield, 20 for the price-to-free-cash-flow ratio and in 12 for the price-to-sales (P/S) ratio. The company has a price-to-sales ratio of 0.30 and a price-to-free-cash-flow ratio of 5.8. A lower price-to-sales ratio is considered better, and Titan International’s price-to-sales ratio is well below the sector median of 0.79. The ratio of price to free cash flow (the lower the better) is significantly better than the sector median of 20.1.
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 ratio, the ratio of enterprise value to earnings before interest, taxes, depreciation and amortization (Ebitda) and the price-earnings (P/E) ratio.
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 D, which is considered negative. The grade is based on the statistical significance of its latest 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 negative earnings surprise for fourth-quarter 2022 of –1.1%, and in the prior quarter reported a positive earnings surprise of 11.3%. Over the last three months, the consensus earnings estimate for the first quarter of 2023 has fallen 6.7% to $0.595 per share due to one downward revision.
The company has a very strong Quality Grade of A based on an F-Score of 8, which is above the sector median. It also has a strong change in total liabilities to assets with a rank of 76. Titan International has a Momentum Score of 34, which is considered weak.
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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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