Farming and agricultural equipment had a tough 2014. A sharp decline in prices of grains, including corn, soybean and wheat led to a fall in earnings of farmers. This in turn led to a fall in demand for agricultural equipment. This segment continues to face headwinds in 2015, but the outlook may not be grim for all companies from the sector.  

Lower Food Inflation

The Consumer Price Index (CPI) dropped 0.3% in November, witnessing its biggest decline since Dec 2008. The rate of decline was also wider than the consensus estimate of a 0.1% drop. Negative trend in oil prices seems to be the main reason behind this decline.

Meanwhile, corn prices are expected to fall further. In September, corn futures slumped to their lowest level in five years. According to the USDA, corn prices are expected to move below $4 a bushel during the second half of 2015 and through 2016. This is a far cry from the $7 levels witnessed in 2013. 

Other Sectoral Headwinds

Data from the Association of Equipment Manufacturers shows that total farm machinery shipments fell 12% in 2014 year on year. Additionally, late model used equipment prices have also declined. The decline in prices is expected to continue into 2015. This will provide farmers with bargains not witnessed in a decade.

Another major industry headwind is uncertain U.S. tax policy on the farming sector. While Sec 179 was extended til the end of 2014, allowing major savings on depreciation, it is unknown whether such tax breaks will be available this year.

Additionally, higher emission standards are increasingly gaining importance. While rapid innovation in the farming equipment arena is taking place around the world, this issue is likely to be a cause for worry for the sector.

North American Market Stronger

According to a survey by Agrievolution Alliance, the U.S. is likely to experience lower order intake. However, certain companies will continue to have considerable national demand for their products. Several companies will anticipate the downturn taking place in the sector after several good years and adjust output accordingly.

At the same time, the long-term fundamentals of the sector remain strong. Globally, the equipment sector has a favorable outlook because the global demand for food, fiber and fuel provides a huge opportunity.

Switching to Electric Machinery

Major players in the sector are already working toward combating concerns on one key area, carbon emissions. For instance, Deere & Company (DE) already offers a fully electric side-by-side named the Gator TE. Additionally, Hitachi (HTCMY) is working on full-sized excavators powered by electricity through cables.

The global agriculture equipment market is expected to grow at a CAGR of more than 7% til 2019. By that year, the global market for agricultural equipment will amount to more than $201 billion. This means that prominent companies will continue to make attempts to bring innovative products to the market which conform to standards of the day.

Our Choices

Trends indicate that diversified players will have the strength to tide over short-term headwinds. Below we present two such stocks, each of which also has a good Zacks Rank.

Alamo Group, Inc. (ALG)  designs, manufactures, distributes and services equipment for agriculture and right-of-way maintenance. Alamo offers equipment for vegetation maintenance, excavators, street sweepers, snow removal and zero-turn-radius movers.

Though third quarter sales for its North American Division declined year over year, sales for its European Division increased 19% over the same period. During 2014, the company made several acquisitions contributing to its growth such as British firm Kellands Agricultural Ltd.

Apart from a Zacks Rank #1 (Strong Buy), the company currently has expected earnings growth of 18.6% for the next year. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 12.25.

Lindsay Corporation (LNN)  is a leading designer and manufacturer of self-propelled center pivot and lateral move irrigation systems. Its products are used principally in agriculture to increase or stabilize crop production while conserving water, energy and labor.

Lindsay will benefit from the expansion of its global irrigation equipment manufacturing capacity. The infrastructure products segment’s revenues increased 20% year over year to $78 million in fiscal 2014, primarily due to increases in road safety products and railroad signals and structures.

Lindsay Corporation holds a Zacks Rank #1 (Strong Buy) and has expected earnings growth of 19.6% for the next year. It has a P/E (F1) of 21.62x.

Despite current headwinds, the long-term outlook of the sector remains bright. Moreover, these stocks have the potential to provide gains even in these circumstances. This is why they would make good additions to your portfolio.