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Caterpillar vs. AGCO: Which Farm & Heavy Construction Machinery Stock is a Better Buy?

Improving conditions in the agricultural and construction machinery sectors due to a gradual, global economic recovery, rebounding prices and anticipated substantial government support augurs well for leading equipment manufacturing companies Caterpillar Inc. (CAT) and AGCO Corporation (AGCO). But let’s find out which of these stocks is a better buy now.

Caterpillar Inc. (CAT) and AGCO Corporation (AGCO) are two of the largest construction and agricultural-equipment manufacturers in the world. CAT manufactures mining and construction equipment, natural gas engines, industrial gas turbines, and diesel-electric locomotives. AGCO delivers  tractors, grain storage bins and related drying and handling equipment systems, broiler production equipment, and other related equipment.

A gradual economic recovery, returning demand from the agricultural and construction sectors, and improving prices have raised hopes for the farming and construction machinery industries.

Because the federal government has voiced its commitment to heavy investment in infrastructure, the growth prospects for equipment manufacturing companies such as CAT and AGCO should improve significantly in the coming months.

While CAT has gained 107.6% over the past year, AGCO returned 126.7%. In terms of past six-month’s performance, AGCO is the clear winner with 79.9% gains versus CAT’s 47.5%. But which of these stocks is a better pick now? Let’s find out.

Click here to check out our Infrastructure Sector Report for 2021

Latest Movements

Last month, CAT acquired the Oil & Gas Division of the Weir Group PLC, a global engineering business based in Scotland. This acquisition should  provide additional value for CAT’s customers because  it  significantly expands its offerings and services.

This month, AGCO introduced its farmer-first strategy to deliver “farmer-focused solutions to sustainably feed our world.” The company believes that this strategy will  maximize  value creation for its shareholders and allow  it to offer exceptional customer experiences to reinforce its brand.

In January,  the company appointed Matthew Tsien to its Board of Directors. His extensive knowledge and experience in technology and product development should help AGCO to expand its smart solutions offerings to its customers.

Recent Financial Results

In the fourth quarter, ended December 31, 2021, CAT’s sales and revenue declined 15% year-over-year to $11.2 billion. The company’s operating profit margin was 12.3% compared with 14.1% for the fourth quarter of 2019. Its operating profit declined 25% year-over-year to $1.38 billion, while its profit per share declined 27.9% from the year-ago value to $1.42 over this period.

AGCO’s net sales for South America increased 21.1% year-over-year to $267.5 million in the fourth quarter, ended December 31, 2021. The company’s gross profit rose 16% from the prior-year quarter to $595.6 million, while its net income was $135.4 million compared to a net loss of $88.3 million for the fourth quarter of 2019.

Expected Financial Performance

CAT’s net income and EPS grew at a CAGR of 58.4% and 63%, respectively, over the past three years. Also, the CAGR of the company’s tangible book value has been 12.3%.

Analysts expect CAT’s revenue to increase 3.3% in the current quarter, 10.9% in the current year and 9.3% next year. The company’s EPS is expected to grow 17.5% in the current quarter, 24.1% in the current year and 29.7% next year.

In comparison,  AGCO’s net income and EPS grew at a CAGR of 31.8% and 34.5%, respectively, over the past three years. The CAGR of the company’s tangible book value has been 13.2%.

Analysts expect AGCO’s revenue to increase 14% in the current quarter, 12% in the current year and 4.6% next year. The company’s EPS is expected to grow 27.9% in the current quarter, 29.2% in the current year and 12.8% next year.

Profitability      

AGCO’s trailing-12-month’s revenue is 1.03 times  CAT’s. But CAT is more profitable, with a gross profit margin of 24.3% versus AGCO’s 22.5%.

However, AGCO’s levered cash flow margin of 8.1% compares favorably with CAT’s 05.2%.

Valuation

In terms of forward PEG, CAT is currently trading at 1.54x, 22.2% higher than AGCO, which is currently trading at 1.26x. Also, its trailing-12-month’s price/sales of 2.88x is 159.5% higher than AGCO’s 1.11x.

So, AGCO is the more affordable stock.

POWR Ratings

AGCO has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. However, CAT has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

Both AGCO and CAT have a Sentiment Grade of B, which is consistent with analysts’ expectation that earnings and revenue will increase.

In terms of Value Grade, AGCO has an A, which is in sync with its lower-than-industry average p/e ratio. In comparison, CAT has a Value Grade of C.

Also, both AGCO and CAT have a Momentum Grade of C, consistent with their price returns over the past six-months.

Of the 32 stocks in the C-rated Agriculture industry, AGCO is ranked #6. In comparison, CAT is ranked #63 in the 88-stock, A-rated Industrial – Machinery industry.

Beyond what I’ve stated above, our POWR Ratings system also rates both AGCO and CAT for Growth, Stability, and Quality. Get all of AGCO’s ratings here. Also, click here to see the additional POWR Ratings for CAT.

The Winner

While both AGCO and CAT are good long-term investments considering their continued investment in premium technology and strategic expansion, AGCO appears to be a better buy based on the factors discussed here. We think AGCO’s much lower relative valuation and stronger financials should help the stock perform better in the long run.

Our research shows that the odds of success increase if you bet on stocks with an Overall POWR Rating of Buy or Strong Buy. If you’re looking for other top-rated stocks in the Agriculture industry, click here. Also, click here if you want to know about the top-rated stocks in the Industrial - Machinery industry.

The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

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CAT shares were trading at $222.82 per share on Thursday morning, up $1.76 (+0.80%). Year-to-date, CAT has gained 23.07%, versus a 5.65% rise in the benchmark S&P 500 index during the same period.



About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.

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