3 Agriculture Stocks You Must Buy For the Long Haul
Ranu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Last summer the US economy was suffering from drought and low agriculture production, and the analysts were writing a flurry of reports about how agriculture stocks will be doomed for the rest of the year. They even anticipated these stocks will take a long time to recover from the lows. I like to imagine what they would say now, when each of those stocks has shown performance well above and beyond their expectations. In this article, I have picked three agriculture stocks that have shown an upside of more than 15% since the second half of 2012. These stocks have solid long term growth prospects and I am sure they will offer a growth run to their investors in 2013.
Deere and Company (NYSE: DE)
Deere was able to sustain itself in the fragile economic conditions thanks to large shipment volumes & higher price realization. Its disciplinary approach towards cost and asset management supports Deere in achieving strong financial results and generating high levels of cash flow, which can be used for further funding in other financial activities.
Two reasons you should love Deere in 2013
- Deere is seeing strong growth potential in South America (Brazil) & Argentina for its harvesting machines, as these countries are planting on a larger scale for 2013. Similarly, with the rising population in China, Western Asia, and India, there is going to be a rise in crop plantation and consumption that may affect Deere positively.
- The worldwide sales in FY2013 look promising because of high commodity prices & strong farm incomes, which are going to be favorable for growing agriculture machinery demand. I see strong growth potential for Deere in the long run as its orders for harvesting equipment (Crop Sprayers & High Horse Power Tractors) are already booked for the initial months of FY 2013.
One more reason to invest in this stock is its return generation capability. Deere distributes a dividend of 2.2% (FY 2012), in comparison to 1.8% (FY 2011), and income investors can expect a higher dividend yield from Deere this year.
Allis-Gleaner Corporation (NYSE: AGCO)
Allis-Gleaner Corporation also sustained itself in the weak economic conditions. The upside of 9% in sales in 3Q 2012 came mainly from North and South America, and I still see these regions as potential growth drivers for the upcoming months.
Talking about its 2013 growth drivers, Allis' new assembly facility in Germany will equip the company with modern, efficient and technologically advanced agriculture tractors. This should be a direct threat to its competitor Deere’s star performer - High Horse Power Tractors. Apart from this, attractive govt. financing programs in Brazil and favorable crop prices have allowed Allis-Gleaner to remain competitive in the market. The company expects a 10% increase in its sales from the South American market with the rising demand of tractors coming from this region for harvesting sugarcane. It recently acquired a South American sugar company called Santal Equipamentos, which already has a dominant market share under the brand name Valtra. Going forward, Allis will sell its products in this market under the same brand name.
All these points reflect that Allis-Gleaner is a strong stock to invest in. The company has an estimated EPS of $5.75 in 2013 and targets a strong operating margin of 10%.
Case and New Holland Global (NYSE: CNH)
Though Case reported a decline in its construction segment in 3Q12, a remarkable performance by agricultural equipments allowed Case to offset it, as well as the negative effects of the currency translation and drought in North America. Additionally, the recent merger with Fiat Industrial will provide strong appetite for Fiat Industrials and its shareholders. This merger has already formed the third largest global capital goods company and will bring CNH the benefits of operational efficiencies. Under this deal a new company, “NewCo,” will be formed, with each shareholder of CNH receiving 3.28 NewCo shares for one share of CNH.
One more advantage which CNH has over Deere is their cheaper products. I expect this company to rise in the upcoming years as a solid brand, seeing the preference it gets from hard-time farmers. While Deere offers the best expensive product line, CNH offers the best bargain product. And this will definitely give CNH an advantage, seeing the demand of lower cost alternatives for farming on the rise as we progress through the year.
Seeing the strong industry demand from farmers for agriculture machines, there is a huge potential and opportunities left for Deere, Case & Holland, and Allis-Gleaner in the emerging as well as mature markets to expand their global competitive positions. Though there may be momentary fluctuations in the stock prices of these stocks in the short run, in my opinion these are top agriculture machinery stocks for the long term.
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