Which Companies Will Profit From Record Farm Crops?

What's the outlook for Lindsay, Deere & Company, and AGCO?

Jan 8, 2014 at 3:57PM

Improved crop yields in North America, and the expectation of near-record farm income in 2014, are creating opportunities for companies that supply agricultural equipment. Amid this favorable environment, let's see how three agriculture equipment manufacturers are performing.

Difficult comparisons
First, here's a leading provider of irrigation systems, but also infrastructure products and services Lindsay (NYSE:LNN).

Lindsay is not showing very good results, especially if we compare them year over year. First quarter 2014 revenues were $147.7 million, flat compared to the prior-year quarter, and net earnings dropped to $10.2 million from $14.7 million a year ago. The decrease in U.S revenues was partially offset by increased demand in international markets and the addition of the filtration and separation company Claude Laval.

It is hard for Lindsay to replicate the huge drought-driven sales of 2012, and this led to an 18% drop in irrigation revenues. However, international irrigation revenues increased 32% driven by strong demand in South America and Australia. Its infrastructure business is experiencing growth in all product lines as well, with a 41% increase year over year.

Nonetheless, Lindsay's short and mid-term outlook is not very promising, since its domestic irrigation market is very significant.

Expanding internationally
Second, we have a worldwide manufacturer and distributor of agricultural equipment, AGCO (NYSE:AGCO).

The third quarter brought good news for AGCO, with net sales reaching $2.5 billion, up 7.9% year over year. Sales in South America grew 35%, and in Asia Pacific 11%.

Even though the company enjoys good domestic performance, international expansion plays a key role in AGCO's strategy. The company aims to gain share in the Commonwealth of Independent States, China, and Africa, where it sees considerable growth prospects. In fact, last September, AGCO made a joint venture with Russian Machines to target the Russian market.

In addition, it plans to invest in production facilities in China over the next 15 years, and grow its presence in Africa. The latter continent presents tremendous growth potential for the agricultural equipment sector, especially considering its small- and medium-scale farmers in need of mechanization.

New businesses
Finally, we have well-known manufacturer Deere & Company (NYSE:DE)

Weak results are coming from Deere. Although earnings per share grew 21% in the fourth quarter, quarterly sales decreased 3%. Unfortunately, Deere expects equipment sales to drop about 2% for its first quarter on annual terms. Not a very promising outlook.

However, the company should benefit from investment and recovery in the Brazilian construction sector. In fact, Deere expects worldwide sales of construction and forestry equipment to grow 10% in 2014, which is good for a division that account for about 16% of revenues. General economic growth and higher housing starts in the U.S. are solid drivers for this sector, and Deere is in place to profit from it.

Regarding agriculture, Deere completed the purchase of Bauer Built Manufacturing in September to serve large farms in key markets globally. Now, the company will be in position to make the largest planter in the industry, 120-feet in width. This highly productive machinery, which will be produced in Brazil, should find growing demand in the country and Argentina.

Bottom line
The fact that North America will probably show very good or even record crops is giving the idea that a bigger supply of grain could generate a drop in commodity prices. Corn dropped about 40% in 2013, so with increasing supply, we might not see prices going up. Even though farming income will be good, ultimately, future grain prices is what drives investments in agricultural equipment.

Comparisons with record sales levels make Lindsay's indicators look weak. Plus, since irrigation sales levels for the remainder of the fiscal year remain uncertain, the company could not be the best stock to hold for now.

Unfortunately for Deere, it is hard to foresee that a great performance of the construction and forestry division could offset a decrease in sales coming from the agricultural division, which accounts for 77% of revenues.

AGCO is in better position to profit from better crops and farmer income. Its increasing international position will also mitigate seasonal fluctuations and increase profits. Right now, it looks like the best stock to scrutinize if you want to start a position in this industry.

Louie Grint has no position in any stocks mentioned. The Motley Fool owns shares of Lindsay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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