Seeking Alpha: Is AGCO Corp. Washed Out Enough To Own?

The rise and fall of the agriculture equipment cycle has gotten plenty of attention, but I don't think it's all that widely appreciated that AGCO (AGCO) has done reasonably well over that cycle - beating Deere (DE) over the past two years and keeping pace over the last year (and beating CNH Industrial (CNHI)). More recently, it seems that some on the sell side have favored AGCO as a "better house in a bad neighborhood" play, but the company is still facing challenges, with share loss in Brazil and weaker relative margins, and AGCO's recent guidance was not particularly strong. The valuation on these shares does look interesting, but investors need to be aware that they're swimming against the tide right now.

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Is AGCO Corp. Washed Out Enough To Own?

Seeking Alpha: Titan Machinery - Is This Roll-Up Rolling Over?

I've had my doubts about Titan Machinery (TITN) for a while now, as I've seen more than a few debt-funded equipment dealership roll-up stories in the past, and they often don't end well. To that end, the last year and two years have been pretty dicey for buy-and-hold investors, as concerns about the health of the agricultural equipment market and the potential for a rebound in construction equipment demand weigh on sentiment.

As it stands today, I have very mixed feelings about this business. I do have some concerns about the health of the ag equipment sector in the coming years, and I have real doubts about Titan's ability to leverage CNH Global (CNH) construction equipment into a viable construction equipment dealership business. On the other hand, it seems harsh to say that the company creates no value at all, and it trades only about 5% above tangible book value. I'd rather play a bullish (or bullish relative to consensus) call on agriculture and/or construction through names like Deere (DE), Caterpillar (CAT), Kubota (KUBTY.PK), or Komatsu (KMTUY.PK), but Titan's underperformance makes it hard to be loudly bearish on the name.

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Titan Machinery - Is This Roll-Up Rolling Over?

Investopedia: Easy To Like Everything About Kubota Except The Price

There's a lot working in Kubota's (OTC:KUBTY) favor these days. The lower value of the yen makes its products cheaper, while rising incomes across Asia make its agricultural equipment more attainable. Add to that a recovery in the U.S. housing market (where the company sells a lot of lawn equipment) and a stated goal to expand the dry land business, and there are multiple attractive growth drivers. The problem? It's just not possible to run an attractive valuation on a discounted cash flow basis, and I can't reconcile the idea of paying a 40% to 100% premium (in forward EV/EBITDA terms) for Kubota compared to Cummins (NYSE:CMI), Deere (NYSE:DE), AGCO (Nasdaq:AGCO), or CNH (NYSE:CNH).

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Investopedia: Deere May Be Getting Too Little Credit

The ways things are in the market today, whenever I see an industrial stock that seems to be undervalued by 15% or more, I start wondering what I missed or did wrong in my modeling. While I do believe the North American ag equipment market may well go negative next year, I think the Street may be too down on Deere (NYSE:DE) shares. A combination of weak ag next year and no real construction recovery in sight is grim, yes, but it seems as though investors have been a little gentler with Caterpillar (NYSE:CAT) and Cummins (NYSE:CMI) through their downturns. I'm hesitant to buy into what looks like a bearish and skeptical tape, but Deere is starting to creep up the ranks of my list of value-priced quality stocks.

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Investopedia: If You Don't Mind Volatility, Deere Could Still Do Alright

Deere (NYSE:DE) is a curious stock. It seems all too common for investors to bid these shares up into earnings (up about 12% this time), only to be disappointed when management's guidance sounds more conservative than they wanted. And yet, more often than not, the company does fine (or better) the next time around. While this pattern can be frustrating for investors who get stomach aches over the week to week moves in their portfolio, it's an opportunity for investors to make entries (or exits) at better prices.

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Seeking Alpha: Quirky Raven Has The Quality, But Not So Much Value

The word quirky probably doesn't do justice to Raven Industries (RAVN), as this small conglomerate is a leader in such disparate markets as reinforced plastic sheeting, GPS-based controls for agricultural equipment, and high-altitude balloons. While Raven has consistently generated strong returns on capital, the free cash flow hasn't been as consistent or impressive. With meaningful exposure to markets like energy and government and what looks to be a premium valuation, I think investors may do better to wait before making a major commitment to Raven with their own capital.

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Quirky Raven Has The Quality, But Not So Much Value

Seeking Alpha: Deere: Mayan Apocalypse Never Materialized, But Mind The Valuation

Given what we've heard recently from companies like Deere (DE), Caterpillar (CAT), Monsanto (MON), Eaton (ETN), and Joy Global (JOY), it looks like it's better to serve the overall-wearing community (farmers) as opposed to the hardhat-wearing community (construction and mining). Deere delivered pretty strong performance from its ag business once again, and though management is often conservative it looks like 2013 will be a solid year. That said, Deere is one of those well-loved industrial stocks, so investors shouldn't turn a blind eye toward valuation.

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Deere: Mayan Apocalypse Never Materialized, But Mind The Valuation

Investopedia: Titan Machinery's Model is Still Risky, But The Growth Is There Today

The markets have seen plenty of stories like Titan Machinery (Nasdaq:TITN) - stories where a company uses debt to consolidate a highly-fragmented, low-margin industry where the hope is that scale can ultimately improve those margins. Many of these stories hit the rocks when acquisition-fueled growth peters out and/or operational missteps make the debt load unmanageable. There's no guarantee that Titan Machinery will meet this same fate, but investors would do well to realize the risks that come with the apparent undervaluation here.

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Investopedia: Fiat Finally Convinces CNH To Seal The Deal

The laws and regulations that govern mergers and acquisitions (M&A) in Europe are a fair bit different than those in the United States, particularly as they relate to minority shareholders. Similar to how Alcon ultimately secured a better offer for shareholders, despite the fact that Novartis (NYSE:NVS) already owned more than three-quarters of the company, CNH Global (NYSE:CNH) has succeeded in obtaining better terms from Fiat Industrial (OTC:FNDSF) - a company that incorporates most of the non-auto businesses of Fiat (OTC:FIATY) for the 12% stake that Fiat did not already own.

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Investopedia: Can Deere Run Again In 2013?

Investors who bought into the "it's different this time" stories on major equipment and component companies such as Caterpillar (NYSE:CAT), Deere (NYSE:DE), Cummins (NYSE:CMI) or Joy Global (NYSE:JOY) got a hard lesson in 2012, as weakness in Europe, China and South America ultimately hit sales, profits and valuations. With the global Ag markets looking stronger relative to mining and construction, however, it's worth asking if Deere could be a solid stock to own on a macro rebound in 2013 and a lengthening of the Ag cycle.

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Seeking Alpha: Deere Smacks Into The Wall Of Worry

It may be true that "Nothing Runs Like a Deere," but it also makes for an unpleasant sound when it smacks into the reality of tougher operating conditions. Deere (DE) typically enjoys a premium valuation within the heavy machinery space -- a recognition of the company's market share, strong brand equity, and reliable performance history. Unfortunately, Deere is showing that it's not immune to the larger economy or operating missteps.

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Deere Smacks Into The Wall Of Worry

Investopedia: Is Titan Machinery Overpaying For Growth?

Investors have been getting more and more nervous about companies tied to heavy vehicle sales in markets like agriculture and construction. To some extent, then, I think the Street was looking for an excuse to approach Titan Machinery's (Nasdaq:TITN) earnings with a skeptical eye. While equipment sales remain robust, margins have weakened and the company's aggressive expansion plans may be coming at too high of a cost if the ag sector has indeed seen its best days.

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Seeking Alpha: Cautious Optimism Seems To Suit Deere

When last I wrote about Deere (DE), I worried that aggressive growth assumptions might be setting investors up for a correction. Since then, the stock has dropped about 10% - helped, I'm sure, by the growing worries about seemingly every economic region outside of North America.

I still have my worries about whether North American farm demand is peaking and whether emerging markets like Brazil, Russia, India, and China can take up the slack. Although these shares are looking increasingly attractive from a cash flow perspective, sentiment and fears of further economic sluggishness are risk factors well worth considering.

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Cautious Optimism Seems To Suit Deere

Seeking Alpha: Agco An Unlikely Bright Spot In Q1

As an investor with a value inclination, I'm always a bit intrigued when a company seems unfairly or illogically maligned relative to its competitors. Given its strong performance in an otherwise mediocre quarter for industrial companies, AGCO (AGCO) springs to mind as one such candidate. Although AGCO's historical financial performance has been pretty volatile, it seems like the market treats this company as an afterthought compared to CNH (CNH) and Deere (DE).

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Agco An Unlikely Bright Spot In Q1

Seeking Alpha: Trying To Reconcile Deere's Double-Digit Growth With Peaking Demand

Deere (DE) is certainly not an ordinary heavy machinery company. Farmers tend to be loyal to brands and Deere has one of the most valuable brands in the world, let alone just in farm machinery. The trouble with Deere as a stock, though, is trying to balance out what is clearly a strong North American market with the past cyclicality of this business and industry.

A Few Hiccups In The Start To The Year
On balance Deere had a solid start to its fiscal year, but there were a couple of details that concern me as they relate to growth expectations. Total revenue rose 11% for the quarter and equipment revenue rose by a like amount - giving the company a better start to the year than expected.


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Trying To Reconcile Deere's Double-Digit Growth With Peaking Demand

Investopedia: Deere Keeps On Running

Investors looking at the results from machinery and component companies like Caterpillar (NYSE:CAT), Cummins (NYSE:CMI) or Deere (NYSE:DE) may think there's a bottomless demand for heavy-duty equipment these days. To be sure, strong agricultural markets are encouraging farmers to spend on equipment, while a torrid pace of construction in the developing world is likewise gobbling up machinery almost as fast as its manufactured. Deere is just as cyclical as it has always been, but investors optimistic on ongoing global growth may yet have more to reap here. (To know more about cyclical stocks, read: Cyclical Versus Non-Cyclical Stocks.)

A Powerful End to a Successful Year  
Deere reported 20% revenue growth for its fiscal fourth quarter, as modest price increases coupled with double-digit tonnage growth drove a successful result. Sales in the large agriculture and turf business were up 18%, while the construction business saw 34% growth on 37% tonnage growth. Although growth outside the U.S. and Canada was much stronger (27% in constant currency), homegrown growth of 14% was hardly poor.

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Investopedia: Keep An Eye On This Titan

No one knows when the next run in agriculture is going to start, or if the last one is truly over yet. After all, some of the high crop prices last year were certainly due to a spate of bad harvests, and favorable weather could deliver a bumper crop this year. Then again, a large amount of the U.S. corn crop is going to ethanol, food demand is ever-growing and natural disasters are a "where" not "if" question. 

When agriculture runs, investors turn to fertilizer stocks like Potash (NYSE:POT), equipment companies like Deere (NYSE:DE), seed companies like Syngenta (NYSE:SYT), and ETFs like PowerShares Agriculture (NYSE:DBA) and MarketVectors Agribusiness (NYSE:MOO).

Perhaps investors should add Titan Machinery (Nasdaq:TITN), the leading dealer of CNH Global's (NYSE:CNH) Case and New Holland agriculture and construction equipment, to their watch lists. Not only is this a viable play on agriculture equipment demand, but it gives investors exposure to a recovery in construction equipment demand (whenever that may happen). 

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Investopedia: Running Like A Deere

When crop prices are high, there is a go-to line-up of stocks for theme investors to play. Fertilizer names like Potash (NYSE:POT) and Mosiac (NYSE:MOS) usually catch a bid, as do seed companies like Syngenta (NYSE:SYT). And then there are the machinery companies - stocks like AGCO (Nasdaq:AGCO), CNH Global (NYSE:CNH) and the biggest of them all, Deere (NYSE:DE). Whether the logic always works out as expected (high crop prices produce more cash for farmers who can buy new equipment) or not, these have been bullish times for crops and bullish times for Deere's stock. 

The Quarter That Was
Whether the byproduct of high crop prices, better credit access, more optimism among farmers, or some combination, Deere delivered another strong quarter. Revenue rose 30% this period to over $5.5 billion, with agriculture (and turf) up 21% and construction (and forestry) up 81% from a low base. Although that was a solid jump in sales, it was nevertheless below the average analyst estimate of $5.67 billion.

Like most heavy machinery manufacturers, Deere's business is more profitable when the factories have solid throughput. To that end, higher revenue helped enable improved gross margin (up about 150 basis points from last year). Deere's management also deserves praise for holding the line on operating expenses, as operating income more than doubled and the operating margin expanded by more the four points. As a result, though Deere came up short on revenue the company handily surpassed the average EPS estimate. (For more, see 4 Things to Know About Earnings Season.)

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An Odd Report From Deere

This quarter's earnings report from Deere (NYSE:DE) is a bit of a puzzler. Then again, a quick look at the analyst estimates going into this report shows that there was not a firm sense of just how this large agricultural and construction machinery company was going to do. 

There was a nearly 10% spread between the high and low revenue estimate for the quarter, and a 45% spread for the EPS estimates. Caterpillar (NYSE:CAT) likewise has a large spread for its next quarter, but non-industrials like Wal-Mart and Procter & Gamble have much narrower spreads - suggesting there is a wide gulf between those optimistic about an ongoing recovery in heavy machinery and those looking for a slowdown or double-dip.

The Quarter that Was 
Sales were a bit light in the July quarter, as the company missed the consensus guess by more than $200 million. Still, revenue did grow 18% and volume growth was responsible for the lion's share of it (up about 13%). The Ag and Turf businesses continue to perform reasonably well with 12% growth, while the Construction and Forestry business is bouncing back (up 59%) from a deep drop in the wake of the housing bubble. 

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