Farm Machinery: An Industry to Watch This Earnings Season

Masam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The earnings season is on a go and the first farm equipment manufacturer to announce its earnings for the last quarter is CNH Global NV (NYSE: CNH), which will be announcing its earnings on Jan. 31. I have already covered the agricultural stocks in detail in one of my earlier posts. This article will only give a brief earnings preview:

I see an attractive set-up for Deere & Co. (NYSE: DE) and AGCO Corp (NYSE: AGCO) with 12% upside to 4QCY consensus and 6% upside to 2013 estimates on average driven by:

(1) Higher net pricing;

(2) Stronger-than-expected growth in farmers’ CAPEX in Latin America; and

(3) the impact of a weak yen and real on AGCO’s cost structure.

AGCO: Margin upside on higher pricing and weaker currencies

I see 12% upside to consensus 4Q12 EPS estimates on higher margins driven by higher net pricing and the positive impact of a weaker Japanese yen and Brazilian real on AGCO’s cost structure. I see 3% upside to 2013 consensus EPS estimates driven by higher net pricing, stronger Latin America agricultural equipment CapEx, and the transactional impact of a weaker yen and real. However, AGCO is not my favorite stock in this space given its low exposure to North America (only 28% of its revenue comes from this region as compared to 42% for CNH and 52% for Deere), where there is massive potential to benefit from enhanced tax incentives and relaxation provided after the aversion of the fiscal cliff (like the extension of 50% bonus depreciation and so on). Let’s see what the company has to announce to its shareholders on Feb 5.

CNH Global: Modest downside to consensus

I see a balanced outlook heading into the quarter with margin upside from higher pricing net of material costs balanced by lower-than-expected CapEx in Europe. To me the main issue with the company is its large exposure to Europe (32%). But still the company has sizable exposure to North America (42%) and Latin America (16%), which compels me to be neutral on this stock. The company is expected to post EPS of 70 cents and revenue of $4.6 billion. Its earnings release is expected on Jan. 31.

Deere: Margin upside on pricing but peaking core North American market

I see 11% upside to consensus 1QFY13 EPS estimates and 5% upside to 2013 estimates for Deere driven by stronger net pricing and higher Latin America agricultural equipment CapEx. I maintain my Buy rating on the stock as I am optimistic on Deere’s leading returns and its ideal revenue mix to benefit from the agricultural boom in North America as well as Latin America. Let’s see whether the company has any surprises for its investors on Feb. 13.

Conclusion

All the farm equipment companies with a large exposure to North and Latin America are poised to benefit from the surge in demand for the equipment. Therefore, I don’t understand why bears keep on chanting that North American agricultural equipment has peaked. 


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