I am very cautious with the markets at these levels, given all the challenges on the horizon. One area that I think holds long term promise is the rising middle class in developing countries, and the companies that produce machinery to supply the food and commodities that this expanding middle class will demand.
Here are three equipment makers with reasonable valuations, fast rising earnings expectations and low price to sales ratios that should do well over the long term.
1. AGCO Corporation (NYSE:AGCO) manufactures and distributes agricultural equipment, including tractors, combines, self-propelled sprayers, hay tools, forage equipment and implements, and diesel engines, and related replacement parts worldwide. The company provides tractors, including compact tractors used in small farms and specialty agricultural industries, such as dairies, landscaping, and residential areas; utility tractors comprising two-wheel and all-wheel drive versions used in small and medium-sized farms and specialty agricultural industries, including dairy, livestock, orchards, and vineyards; and horsepower tractors used in large farms and on cattle ranches for hay production.
It also offers combines, and application equipment, including self-propelled three- and four-wheeled vehicles and related equipment for use in the application of liquid and dry fertilizers, and crop protection chemicals; chemical sprayer equipment; and related equipment, including vehicles used for waste application that are specifically designed for subsurface liquid injection and surface spreading of biosolids, such as sewage sludge.
Valuation and Price Targets: AGCO is selling at just under 13.5 times 2011’s projected earnings and under 12 times next year’s consensus EPS. AGCO has pulled back approximately 10% in May and now sells at 0.65 trailing revenues and a PEG of 1.33. The company sells in the bottom half of its five-year valuation range based on P/E, P/S, P/B and P/CF, and AGCO has grown earnings an average of 10% annually over the past five years. AGCO has shattered earnings projections for the last four quarters, and earnings estimates have risen significantly for the next two quarters as well as 2011 and 2012 over the last three months. The stock is at $51.49. Price targets are $80 at S&P and $60 at UBS.
2. Caterpillar (NYSE:CAT) manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide. It operates through three lines of businesses: Machinery, Engines, and Financial Products. Machinery offers construction, mining, and forestry machinery, including track and wheel tractors, track and wheel loaders, pipelayers, motor graders, wheel tractor-scrapers, track and wheel excavators, backhoe loaders, log skidders, log loaders, off-highway trucks, articulated trucks, paving products, skid steer loaders, underground mining equipment, tunnel boring equipment, and related parts. It also manufactures diesel-electric locomotives, and manufactures and services rail-related products and logistics services for other companies.
Valuation and Price Targets: Caterpillar sells at just over 15 times this year’s expected earnings but under 12 times 2012’s projected earnings. CAT has crushed earnings projections for the last four quarters and earnings estimates have risen for the next two quarters as well as 2011 and 2012 over the last three months. It is priced at a PEG of 0.71 and has an A-rated balance sheet. It pays a dividend of 1.7%. Its acquisition of Bucyrus should expand its sales of mining equipment in developing markets while also providing cost synergies. Its 10 percent pullback in May has left the stock at $104.60. Price targets are $142 at S&P, $148 at Credit Suisse, and Raymond James has its target at $135.
3. Deere & Company (NYSE:DE) provides products and services primarily for agriculture and forestry worldwide. The company operates in three segments: Agriculture and Turf, Construction and Forestry, and Credit. The Agriculture and Turf segment manufactures and distributes a line of farm and turf equipment and related service parts, which include large, medium, and utility tractors; loaders; combines, cotton, and sugarcane harvesters and related front-end equipment; sugarcane loaders; and tillage, seeding, and application equipment. This segment also offers hay and forage equipment comprising self-propelled forage harvesters and attachments, balers, and mowers; turf and utility equipment, such as riding lawn equipment, walk-behind mowers, golf course equipment, utility vehicles, and commercial mowing equipment; integrated agricultural management systems technology; precision agricultural irrigation equipment and supplies; landscape and nursery products; and outdoor power products.
Valuation and Price Targets: Deere is priced at 13.5 times this year’s consensus earnings but under 12 times 2012’s projected earnings. DE has significantly beat earnings projections for the last four quarters and earnings estimates have ticked up for the next two quarters as well as 2011 and 2012 over the last few months. The stock has also given up approximately 10 percent of its market value in May and is now priced at a PEG of 1.23 and is selling at 1.24 trailing revenues. It pays a small dividend of 1.9%. As the largest maker of farm equipment in the world, Deere should continue to be a primary benefactor of the world’s improving living standards and increasing demand for grain. Price targets are $115 at S&P, $111 at Credit Suisse, and Goldman Sachs is also at $111.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.