Do These Machinery Stocks Have Value to Dig Up?

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

Farming and construction machines are critical to keeping society functioning, and that's a powerful moat. While they're essential, unfortunately they can also be finicky stocks because they're vulnerable to commodity price changes. Let's see how the following companies stack up.

Global goodness

AGCO (NYSE: AGCO) operates as a manufacturer, distributing its hardware through independent distributors around the world. This is good because it takes away the challenges of dealing directly with consumers and because it allows operation in a diverse set of marketplaces. The company is earning a modest 5.2% profit margin, and it trades for a reasonably cheap 9.8 times earnings. AGCO even pays a slight 0.8% dividend -- about comparable to today's savings accounts, at least.

With a history of well over a century in the farm business and several internationally renowned brands, AGCO seems to have what it takes to keep on going. The only major challenge I can see is that the company's marketplace of farmers is dominated by large conglomerate enterprises that may be more inclined to follow trends than to do what's most effective. That is, if one large agricultural company chooses to use a competitor's machinery, many others could follow suit and deprive AGCO of market share en masse.

Overall, I consider AGCO a good investment with a low risk of heading south.

Mature markets and small prospects

Alamo Group (NYSE: ALG) takes a more concentrated approach than AGCO does, focusing far more of its resources on Europe. With dozens of regionally identifiable brands, Alamo is well integrated into both the European and American markets, which are some of the most major food and cash crop producers in the world. Since Europe and the US are leading the charge toward using crop-based biofuels, there is also a lot of demand for the equipment that Alamo produces.

Of course, there are some problems here. Alamo is not trading too cheaply at around 16 times its earnings, and the company's profit margins are a rather paltry 4.6%. The 0.7% dividend yield is also nothing special, making one wonder why the company bothers to divert cash that could be used for growth. This could be valuable cash being tossed away because Alamo is a $473 million company, which gives it plenty of room to expand. While biofuels provide a great potential future, the US and Europe are very well established markets that need little expansion, and thus not much equipment.

Overall, I would recommend giving Alamo a pass until it either drops into the under-10 P/E range or grows to a larger market cap with earnings to justify that growth.

Low-priced but not cheap

CNH Global (ADR) (NYSE: CNH) operates in nearly every country on earth, which gives it a huge amount of potential markets and room to expand. With 11,500 dealers of the full line, this construction and agricultural machinery company has plenty of avenues for its trailing $20.5 billion in sales. CNH also has reasonably high profit margins at 5.8%. Despite this, the company is only trading at around 8 times earnings and 1.1 times its book value, which is a pretty decent deal overall.

On the whole, the only major concerns that keep CNH from being perfect are its lack of a dividend and the overall global economic outlook in the wake of the Great Recession. As the economy picks back up and construction resumes in full force, CNH has definite possibilities for solid growth.

On the whole, I would recommend taking a good look at CNH as a solid candidate for your portfolio.

The Foolish bottom line

Construction and farming machinery stocks have taken some damage lately because of the recession, but on the whole they haven't deserved the battering they've gotten. You can find some truly great deals amidst this sector, and many of these options are solid companies.

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Chris Hodge has no position in any stocks mentioned. The Motley Fool owns shares of Alamo Group. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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