The Russian-Ukrainian war has been driving up commodity prices since rumors began of its outbreak. Additionally, supply chain issues have disrupted food supplies globally, leading to higher food prices. Additionally, the economic recovery from the pandemic has increased consumer spending capacity.
Recently, corn and soybean prices have reached record highs and are currently trading around them. This is important because both of these grains are essential to the cash crop farming scene in the United States. These catalysts also increase farm incomes, encouraging farmers to increase production.
With the increase in agricultural activities comes a demand for agricultural equipment, which is also driven along with rising commodity prices. Farm equipment such as tractors, excavators and other engines and implements have seen strong sales growth this year due to their ability to reduce overall costs for farms.
Importantly, the use of advanced agricultural technologies to improve agricultural processes and meet changing customer demand is a major enabler, which should drive long-term growth.
According to Intelligence of Mordorthe agricultural machinery market is expected to grow at a CAGR of 5.4% from 2022 to 2027.
In addition, agricultural equipment and machinery, being depreciating assets, must be replaced after a certain period. This means that the equipment industry benefits from sustainable demand, which will continue to generate sustainable revenues for companies in this industry.
Three agricultural equipment companies are taking advantage of these advantages whose stock market valuations are constantly increasing this year.
Agco manufactures and markets advanced agricultural equipment and spare parts. Shares of the company are up about 3% year-to-date.
Increased farming activity, demand for agricultural products and demand for replacement equipment have driven the company’s growth in recent months. The company’s targeted investments in technology and agricultural solutions, while implementing effective cost reduction measures, contribute to margin efficiency.
In line with its strategy, Agco acquired JCA Industries earlier this month to strengthen its position in the development of stand-alone software for agricultural machinery, implement controls and electronic system components.
Additionally, another encouraging point is Morgan Stanley analyst Courtney Yakavonis’ recent price target increase to $160 from $158 while maintaining a Buy rating.
Wall Street is fairly bullish on the stock, with a strong buy rating based on five buys and one hold. The average projection for AGCO’s stock price of $165.83 indicates upside potential of 39.4% from current levels.
In addition to being the world’s largest manufacturer of agricultural, forestry and construction equipment, Deere also provides leasing and financial services to organizations. DE stock is up 4.45% so far this year.
Deere’s efforts in precision agriculture, along with continued demand for replacement equipment, should drive long-term growth. In the short term, the rise in agricultural commodity prices is very well suited to the company’s growth.
Recently, Oppenheimer raised his price target to $446 from $432 while reiterating a Buy rating. However, Bank of America analyst Ross Gilardi sounded a bit cautious amid continued headwinds from the fertilizer shortage. He noted that dealers were bullish on prices and inventory, but he “detected a little more caution on order trends due to fertilizer shortages than expected.”
Nonetheless, Wall Street is quite bullish on the stock, with a moderate buy rating based on five buy ratings and five hold ratings. Deere’s average price target is $442.67, indicating upside potential of 21.4% from Wednesday’s price levels.
Construction equipment maker Caterpillar has outperformed the broader market over the past three months, fueled by strong demand for agricultural equipment and machinery. Moreover, like its aforementioned peers, the demand for replacement equipment is also driving its revenue.
The company is known for refurbishing and marketing old equipment. CAT was thrust into the limelight when it had to reprocess around £127 million of old equipment as part of its drive to be more environmentally friendly while increasing service revenue. The company believes that the success of its efforts can give it a competitive advantage.
Caterpillar is striving to grow its service revenue by approximately 100% to $28 billion by 2026, highlighting its encouraging outlook.
Recently, the Argus analyst John Eade maintained a Buy rating on CAT stock with a price target of $235. He believes that the recent fall in stock prices has opened up a good investment opportunity. The analyst is encouraged by the return of demand for its remanufactured products after witnessing weakness during the coronavirus crisis.
Caterpillar’s strong balance sheet makes it an excellent candidate to pursue growth-generating initiatives such as product innovations, mergers and acquisitions, partnerships, and more.
Wall Street is also bullish on Caterpillar’s outlook, with a strong buy consensus rating based on 10 buys, one hold and one sell. Caterpillar’s average price target is $247.42, implying 20.7% upside potential.
The agriculture/livestock sector has been a critical industry and always will be. This means that demand for most industries in this sector, including the agricultural equipment industry, will likely still be blessed with steady demand despite a few hiccups here and there.
However, the current high commodity price situation, which is expected to continue for some time now, should benefit Agco, Deere and Caterpillar more than their peers.
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