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Agricultural commodities are moving higher- Expect pick-and-shovel plays to do well
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A bullish trend in AGCO
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Beating expectations and three consecutive quarters of earnings growth
AGCO Corporation (AGCO) manufactures and distributes agricultural equipment and related replacement parts worldwide. The company produces high horse-powered tractors for row crop production, soil cultivation, planting, land leveling, seeding, and commercial hay operations. It also provides utility tractors for small and medium-sized farms, dairy, livestock, orchards, and vineyards. Small farmers, specialty agriculture, landscapers, equestrians, and residential applications use the company’s compact tractors. AGCO also provides a wide variety in productions from storage bis, drying and handling equipment, ventilation and watering systems, and many other products required by the agricultural industry.
In the world of commodities, producers tend to increase output when prices rise. More production requires more equipment. AGCO is a company that stands to revenues and earnings in 2021 based on the agricultural markets’ price action over the past months.
Agricultural commodities are moving higher- Expect pick-and-shovel plays to do well
Over the second half of 2020, agricultural commodity prices took off on the upside.
Source: CQG
The weekly chart shows that corn futures rose to the highest price since July 2019 at over the $4.40 per bushel level.
Source: CQG
The monthly chart of soybean futures highlights the rise to over $12.40 per bushel, the highest level since August 2014.
Source: CQG
The monthly CBOT wheat chart shows that the primary ingredient in bread moved to over $6 per bushel for the first time since 2015 and to the highest price since late 2014.
Many factors contributed to higher agricultural prices, including a falling dollar, rising money supply, and emerging inflationary pressures. Higher levels will encourage producers to increase output in 2021. More production increases the demand for supplies. Pick-and-shovel companies like AGCO stand ready to profit from the bullish trend in agricultural products.
A bullish trend in AGCO
The long-term trend in AGCO shares is bullish. The stock broke out to the upside in October.
Source: CQG
As the chart dating back to 1992 highlights, AGCO has been making higher lows and higher highs over the past three decades. In October 2020, the stock rose to a new record high, and it extended to the upside over the past two months. At $103.10 per share on December 22, the company has a market cap of over $7.72 billion. AGCO trades an average of 677,140 shares each day. The company pays shareholders a $0.64 dividend, which equates to a 0.62% yield.
Beating expectations and three consecutive quarters of earnings growth
The trajectory of revenues since 2016 has been mostly higher.
Source: Yahoo Finance
As the chart shows, revenues steadily grew from 2016 through 2018. Even though they dipped in 2019, they were above the 2017 level.
Source: Yahoo Finance
The quarterly chart of revenues displays growth over the past three periods. A survey of fifteen analysts on Yahoo Finance has a target range of $89 to $122 for the stock, with many rating AGCO a buy, overweight, or outperform.
Source: Yahoo Finance
AGCO has beat consensus EPS forecasts over the past three consecutive quarters. The company reported $2.09 per share in Q3 compared to a 98 cents projection. The current consensus forecast for Q4 is $1.10 per share.
Nothing can make the prospects for AGCO more attractive than rising agricultural prices. The price action in the grain and oilseed futures markets over the past months is why producers will need more supplies, and AGCO is a growth stock for 2021.
Global demographics also support AGCO for the future. At the turn of this century, the global population stood at around six billion.
Source: US Census Bureau
At 7.731 billion, the population has grown by 28.9% over the past two decades. The demand side of the fundamental equation for agricultural products that provide nutrition to the world is ever-growing. Each quarter, there are twenty million more mouths to feed. In 2020, the world required more food than in 2019, and it will need even more in 2021. Production must keep pace with the rising demand. Therefore, the addressable market for AGCO’s products is growing, which makes the company a growth stock.
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shares were trading at $369.30 per share on Wednesday afternoon, up $2.06 (+0.56%). Year-to-date, has gained 16.88%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Andrew Hecht
Andy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles. More...
