It's boom time for farmers, with high grain prices translating into more income for farms. In 2007, farm income hit a record $87.5 billion, 26 percent higher than 2006 and 52 percent above its 10-year average.
"The farmer is now in a great position to spend," says David Fondrie, chief investment officer of Heartland Advisors, which runs a family of mutual funds. "Farm balance sheets are in great shape, the land is worth more, and prices are high for crops. Farmers can now go out and buy more machinery, as well as crop inputs like fertilizer and seeds."
Assuming these cash-rich farmers reinvest some of their windfall in the business, makers of tractors, combines, planters, sprayers, and tillage equipment are poised to harvest a bounty of profits. Here are three stocks worth considering:
Deere: Roughly half of the farm equipment sold in North America carries Deere's familiar green-and-yellow emblem. The Moline, Ill., company, which leads the world in farm-equipment sales, is expanding its operations in the so-called BRIC countries—Brazil, Russia, India, and China.
Deere expects farm-equipment revenues to grow 17 percent in 2008, driven by sales of large tractors, which are becoming essential as farms consolidate and expand. Taking into account construction and forestry equipment, sales of which have been crimped by the U.S. housing slump, Deere expects its overall equipment revenues to rise about 12 percent this year.
Although shares have soared to more than $80 from $50 a year ago, analysts still believe the stock has room to run. Morgan Stanley sees Deere's shares hitting $175 over the next 12 months, and Bank of America thinks the stock will reach $186. "Deere is still in the early stages of a multiyear boom in farm equipment," Morgan Stanley analyst Robert Wertheimer wrote in a recent note to clients.
CNH Global: With a market value of $13.6 billion—less than half the size of Deere—CNH is the second-largest manufacturer of agricultural equipment in the world. The Dutch company, which is the product of a 1999 merger between Case Corp. and New Holland NV, has vast geographic reach with 39 manufacturing facilities in 160 countries. In 2007, the company reported revenue gains in every region, including a whopping 86 percent increase in Latin America. Total farm-equipment sales rose to $10 billion, up 27 percent from 2006.
Like Deere, CNH is not a pure agricultural play: The company draws nearly a third of revenues from construction equipment (and 7 percent from an equipment-finance unit). Although healthy overseas construction-equipment sales offset the sagging North American construction market in 2007, CNH says worldwide sales in that unit look flat in 2008. (The company expects total equipment sales to increase 10 to 15 percent.)
Shares of CNH plunged January 23 after it reported a threefold increase in fourth-quarter profits that fell short of Wall Street's expectations. As a result of the pullback, the stock currently trades at just 13 times analysts' 2008 estimates of $3.67 per share.
AGCO. Although it's headquartered in Duluth, Ga., AGCO does a scant 10 percent of its business on North American soil. The bulk of the company's revenues come from western Europe, but AGCO's most lucrative foothold is in Brazil, where it enjoys a 60 percent share of the tractor market. The company is also gaining share in eastern Europe and Russia, home to vast tracts of farmland and aging tractor fleets.
Unlike Deere and CNH, AGCO focuses exclusively on agricultural equipment, which is sold under 19 different brands. The company invests heavily in research and development to produce specialized equipment, such as the high-power, triple-axle tractor it presented in November at Agritechnica, a European agriculture exhibition.
"AGCO stands out in terms of technological development," says Michael Cook, comanager of the New River Small Cap fund. "With agricultural equipment, one size doesn't fit all. Different land requires different types of tractors with different technologies. Manufacturers who spend the most time in research and development getting the cutting edge in technology are really the ones who will do well."