Thursday, September 2, 2010

Sterne Agee & Leach: "Some Upside Crops Up for Ag Machinery" (AGCO; DE; LNN; VMI)

From Barron's Investors' Soapbox:
Sterne Agee sees improved farmer sentiment and unit economics bode well.
WE ATTENDED THE 2010 Farm Progress Show in Boone, Iowa. As expected overall tone was positive, confirming our fundamental thesis for agricultural machinery. While tough to quantify, we think order rates this fall likely see a modest lift from incrementally more positive unit economics and improved farmer sentiment.
We found farmers questioning U.S. Department of Agriculture (USDA) yield estimates, believing downward revisions are more likely than further upward revisions in the coming weeks. Also, we heard of moisture levels for corn running relatively lower than expected, suggesting that combining could get under away earlier this year.

Most of the farmers we spoke with appear to be relatively accepting of price increases associated with the new lower emission engines. All three equipment providers that we met with affirmed that they are on track with respect to Interim tier 4 engines.

Deere (ticker: DE) (rated at Buy) introduced its new 8R Series row crop tractor line, which has been dubbed the "most intelligent" tractor on the market with communication features that enable Deere field technicians to remotely diagnose a problem, potentially shortening any downtime associated with a service issue.
The new 8R Series also features ActiveCommand Steering (ACS), which varies steering wheel resistance with speed, allowing for greater control at higher transport speeds. To accommodate potential loss of power from utilizing Exhaust Gas Recirculation (EGR) versus Selective Catalytic Reduction (SCR) horse power has been increased for the 2011 8R Series Tractors. Deere sees EGR as the simpler and proven technology, utilizing an additional exhaust filter to reduce emissions and does not require a second fuel (diesel exhaust fuel).

CNH Global (CNH) (rated at Neutral) highlighted that early tests show its SCR solution providing 10% efficiency gains over existing tractors and CNH believes its SCR solution can result in even greater fuel savings than the targeted 10% and sees benefits accruing to owners in the form of reduced service intervals.
AGCO (AGCO) (rated at Buy) gave a fairly upbeat update with some detail into its current order book for North American (fairly consistent with second-quarter 2010 up 25%) including, combines up single-digit, more-than-140 horsepower up 20%, under-100 horsepower up 25%, with continued softness in the 100-to-140 horsepower category, as well as hay and forage equipment. AGCO was also upbeat about its recent introduction of a redesigned Gleaner class 7 combine, which has increased processing capacity among other new features. AGCO asserted that its biggest opportunity to increase North American market share remains the continued improvement in its dealer-distribution network.

We spoke with all four of the Center Pivot Irrigation manufacturers at the show, including Valmont Industries (VMI) (rated at Neutral), Lindsay (LNN) (rated at Neutral) and private competitors Reinke and TL. While all four continue to introduce new control features, Valmont's patented variable rate irrigation (VRI) stood out to us as the most promising. VRI utilizes global positioning system maps to match water and nutrient application rates to field conditions, providing higher yield potential and lower input costs.

We think the VRI's ability to upgrade the installed base of Valley pivots could prove critical given Valmont's leading market share and the aggressive posturing of smaller market-share-focused competitors.
Nonproduct enhancement takeaways include the sense that early buy programs this fall are likely to be successful as general optimism has improved dealer confidence, and that pricing continues to be rational with discounts expected to be stepped down through the end of the year.
-- Michael J. Coleman
-- Lawrence T. DeMaria
Previously at Investors' Soapbox:
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