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Stock Analysis & Ideas

3 Agriculture Stocks Investors are Buying

The Russia-Ukraine war has been pushing up commodity prices ever since rumors began about its onset. Moreover, supply chain issues have been disrupting food supplies globally, leading to elevated food prices. Also, the economic recovery after the pandemic has increased the spending capacity of consumers.

Recently, corn and soybean prices increased to record highs and are currently trading around them. This is important because these two grains are key in the cash crop farming scene of the U.S. These catalysts are also boosting agriculture income, providing an incentive for farmers to ramp up their production.

Accompanying the elevated farm activities is the demand for farm equipment, which is also being pulled up along with rising commodity prices. Agricultural equipment like tractors, excavators, and other engines and tools have been seeing strong sales traction this year due to their ability to reduce the overall costs for farms.

Importantly, the use of advanced agriculture technology to improve farming processes and keep up with evolving customer demand is a major catalyst, which is expected to drive long-term growth.

According to Mordor Intelligence, the agricultural machinery market is expected to grow at a 5.4% CAGR from 2022 to 2027.

Also, farm equipment and machinery, being depreciating assets, need to be replaced after a certain period. This means that the equipment industry is blessed with a sustainable demand, which will keep generating sustainable income for companies in this industry.

Riding on these upsides are three agriculture equipment companies whose stock valuations are on a steady uphill track this year.

Agco (NYSE: AGCO)

Agco manufactures and markets advanced farm equipment and replacement parts. The company’s shares have increased about 3% year-to-date.

Increased farm activities, demand for agricultural produce, and demand for replacement equipment have been driving the company’s growth in the past few months. The company’s focused investments in farming technology and solutions, while implementing efficient cost reduction measures, are contributing to margin efficiencies.

In line with its strategy, earlier this month, Agco acquired JCA Industries to gain a firmer footing in the autonomous software development for agricultural machines, implement controls, and electronic system components.

Moreover, another encouraging point is the recent price target increase by Morgan Stanley analyst Courtney Yakavonis to $160 from $158 while maintaining a Buy rating.

Wall Street is fairly optimistic about the stock, with a Strong Buy rating based on five Buys and one Hold. The average AGCO stock price projection of $165.83 indicates 39.4% upside potential from current levels.

Deere (NYSE: DE)

Apart from being the world’s largest manufacturer of agriculture, forestry, and construction equipment, Deere also provides leasing and financial services to organizations. DE stock has rallied 4.45% so far this year.

Deere’s efforts in the precision agriculture space, along with a consistent demand for replacement equipment, are expected to boost growth in the long run. Looking into the near term, the upward trek of agricultural commodity prices is very well suited for the growth of the company.

Recently, Oppenheimer increased its price target to $446 from $432 while reiterating a Buy rating. However, Bank of America analyst Ross Gilardi was a little cautious of the persistent fertilizer shortage-related headwinds. He noted that dealers were upbeat on pricing and inventory, but he “detected a little more caution on order trends due to fertilizer shortages than anticipated.”

Nonetheless, Wall Street is fairly optimistic about the stock, with a Moderate Buy rating based on five Buys and five Hold ratings. The average Deere price target is $442.67, indicating upside potential of 21.4% from Wednesday’s price levels.

Caterpillar (NYSE: CAT)

Construction equipment maker Caterpillar has performed better than the overall market in the past three months, fueled by the strong demand for farming equipment and machinery. Moreover, like its aforementioned peers, demand for replacement equipment is also driving its revenues.

The company is known to refurbish and market old equipment. CAT was thrust into the limelight when it took approximately 127 million pounds of old equipment to be reprocessed as part of its efforts to be more environmentally friendly while boosting service revenues. The company believes that the success of its efforts can give it a competitive edge.

Caterpillar is working toward growing its services revenues by about 100% to $28 billion by 2026, which highlights its encouraging prospects.

Recently, Argus analyst John Eade maintained a Buy rating on the CAT stock with a price target of $235. He believes that the recent stock price dip has opened a good investment opportunity. The analyst is encouraged by the comeback 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-driving initiatives like product innovations, mergers & acquisitions, partnerships, etc. Notably, the company recently upped its dividend payments by 8%, which is another point to be optimistic about.

Wall Street is also bullish on the prospects of Caterpillar, with a Strong Buy consensus rating based on 10 Buys, one Hold, and one Sell. The average Caterpillar price target is $247.42, implying 20.7% upside potential.

Parting Thoughts

The agriculture/farming sector has been an essential industry and will always be. This means that the demand for most of the industries within this sector, including the agricultural equipment industry, is likely to always be blessed with consistent demand despite some hiccups here and there.

However, the present situation of high commodity prices, which is expected to continue for some time now, is likely to benefit Agco, Deere, and Caterpillar more than their peers.

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