Dont Buy Any in this Space

Anything having to do with large financed purchases will not be good for a while. Stay out.

Farm Equipment Looks terrible

This week in trading was terrible for the likes of Agco, John Deere and Case New Holland. I am not recommending this group at all as I believe that big equipment purchases will be delayed. If you believe the US stimulus plan will bring on heavy equipment purchases, John Deere is a better play, but in this case CAT may be a wiser choice. Keep watching crop prices, if they begin to rebound in a strong fashion, some of these plays are still good, but combines are what has been pushing these companies and these purchases can be anywhere from a quarter million to half million dollars. I believe many of these purchases will not be seen again until next year, and if this is the case might not rebound very quickly.

Combines Will Be This Year's Story

Some times Wall Street gets ahead of itself, just like some times it doesnt. The current market looks as if the financials are making a huge turnaround and that many commodity stocks are pulling back even in the face of estimates being raised for the year. I do believe that we made a huge step with respect to write offs in the financials, but most likely there will continue to be pain. Anyone that ventures into the unknown now had better have long term targets and or be an expert in trading as the markets tip to the extreme on any comments either positive or negative. I am unsure as to the gold market and other precious metals, and look somewhat positively on the current coal and steel markets, but most of all I believe that the agricultural markets will continue to roll. Looking at their current run, many have taken the negative side based only on the belief that nothing goes up forever, but I have not seen anything that points to a slowing of agricultural commodities in the near term. Arguments can be made, and I am open to all of them, but the fact remains that overseas markets will pay a premium to get what is not already locked into contracts. I am currently long POT and MON, and just recently sold IPI in favor of a position in AAPL. That was not done because I believe IPI is headed downward, I just was too heavily weighted in the fertilizer realm. I believe all of these stocks are good, but value investors may want to start thinking about companies such as DE, CNH and AGCO. These companies have all been hit hard by the construction bear market even though the current environment with respect to farming is robust. When looking at these stocks, the overseas growth numbers are astounding. The strong currencies abroad and higher corn, soybean and wheat prices have made it affordable for many of these emerging markets to buy machinery that they would never have been able to afford. Looking at AGCO, their year over year numbers for the first quarter were very good. Net sales were up 34.1%. Gross profit rose 43.7%. Adjusted operating income increased 106.8%. Adjusted operating margins were up 1.9% and adjust diluted EPS was up 142.3%. Tractor and combine production were up 25%. They also increased their estimated 2008 production to 12%-14%. To understand where the majority of these numbers are coming from we must first disect the areas that are purchasing this machinery. If you want further information with respect to this check my writing on CNH. Tractor sales were down in the first quarter in North America for AGCO as the industry saw sales fall 11%, but industry sales of combines were up 12%. AGCO's sales in South America were a different story. Tractor and combine demand were awesome as the only continent with the ability to make a major expansion of farmland is doing just that to help meet the needs of the food consumer. Industry tractor sales were up 45% and combine sales increased 77%. I believe this is only the beginning and the best way to substantiate this is to look at the last major agricultural expansion and the time it took to reach fruition after WWII. If this takes just half as long, we could see at least a couple more years, but I think this could continue well into the latter half of the next decade. AGCO is extremely attractive from a regional standpoint as only 21% of their regional net sales come from North America. Europe, Africa and the Middle East accounted for 58%, while South America 18% and East Asia and Pacific 3%. Year over year sales increased but margins continued to improve also. Adjusted operating margins improved from 3.4% to 5.3% showing wide range demand. Since the first quarter of 2006, AGCO has continued to decrease its net debt to capital. At that time debt was $896 million or 36% (debt to capital), and now is down to $719 million in debt or half (debt to capital) of 18%. Continued success has led AGCO to provide 2008 guidance of 20% to 22% sales growth, diluted EPS of $3 to $3.15, and free cash flow of $175-$200 million. AGCO is a little more expensive than DE and CNH, but I think it is warranted based on a larger exposure to agriculture on a percentage basis. They also are smaller and more mobile than their competitors. They have done well with respect to earnings as they have beat estimates for the last four quarters, and as high as by 156.7% and no lower than 26.4%. It seems as other players cannot get the machines made fast enough they are able to pick up the proverbial slack, and increase market share as a result. Their current PE of 18 is very cheap as analyst estimates are for growth of 35.3% this year and 25.2% nexty year. I also believe that growth over the next five years will be closer to 20% based on technology growth in emerging markets including GPS operated machinery. Dont get me wrong I like all three companies with respect to stock price, but prefer AGCO over DE and CNH for the growth investor.