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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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: Toro And The Runaway Recovery

Wall Street is always looking for a rebound play, and there has been no shortage of interest in going long on the housing/consumer recovery this year. While data from home improvement superstores like Home Depot (NYSE:HD) and Lowe's (NYSE:LOW) does indeed support the idea that the worst has passed, investors have been pretty aggressive in bidding up many residential housing plays. Toro (NYSE:TTC) remains a top-notch manufacturing company, but absent a buyout bid, it seems hard to see how cash flow is going to grow fast enough to leave much upside on the table for today's buyers.

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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: 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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