AGCO AGCO Corp

A world economic recovery, as seen from equity market improvements off the lows experienced since the 2008 global crisis, has been quite impressive. The journey was difficult with ever-present headwinds hindering growth, the most recent of which was the Eurozone debt crisis that significantly slowed down the overall growth pace in 2011. Lingering effects also impacted the
first and second quarters of 2012.

According to the World Economic Outlook published by the International Monetary Fund (IMF) in June 2012, the world economy is expected to grow roughly 3.5% in 2012 and 3.9% in 2013. The projection for 2012 is 10 basis points (bps) and for 2013 is 20 bps lower than IMF's April forecast.

Growth in advanced economies is projected at 1.4% in 2012 and 1.9% in 2013, while it is anticipated that the emerging and developing countries would grow by 5.6% in 2012 and 5.9% in 2013.

No doubt obstacles still persist as can be deduced from unstable European economy and slowly reviving advanced countries, the overall growth picture may not materially deteriorate from the IMF's June forecast.

Demand for the Machinery industry is correlated with increasing economic activity, which stimulates demand for industrial products, thereby increasing the need for new/advanced machinery. The major end-markets for the machinery industry include agriculture, construction, mining and energy industries, among others.

Machinery Industry Prospects in the U.S.

The IMF expects the United States to grow 2.0% and 2.3% in 2012 and 2013, respectively. Increasing consumption, higher exports and slightly improved employment conditions despite recent evidence of softness, all bode well for the economy. Gross fixed capital formation is projected to grow 4.8% and 5.9% in 2012 and 2013, respectively.

The Machinery industry in specific and the broader factory sector in general has been doing reasonably well during the economic recovery. While momentum seems to be flagging a bit recently, the group's growth performance has been one of the best in the economy.

In the second quarter of 2012, industrial production in the United States rose by 4.7% while manufacturing output increased by 1.4%. According to the US Census Bureau report, machinery shipments in the first half of 2012 increased 11.1% year over year and new machinery orders grew by 1.7% in the same period. Machinery order backlogs at the end of the quarter escalated 12.5%.

In the first half of 2012, shipments for construction and industrial machinery rose by 27.1% and 9.4%, respectively. Shipments for mining equipment were up 7.2% while farm machinery shipments rose 6.1%.

International demand for technologically advanced construction and agriculture equipment is improving. The United States' construction equipment exports rose 24% while agricultural equipment exports registered a 29% increase in the first half of 2012, according to the Association of Equipment Manufacturers (AEM). In 2011, capital equipment exports reached $160 billion and accounted for nearly 14% of the global machinery market share.

Japanese Markets

Japan's Cabinet Office reported a decline of 1.7% year over year and 1.4% sequentially in core machine orders in the second quarter of 2012. However, on a monthly basis, June recorded 5.6% monthly growth and July witnessed a 4.6% increase in core machine orders.

Recovery through acceleration in consumer spending and reconstruction activities failed to gain momentum as weak foreign economies, especially Europe's debt crisis, stalled growth in the country.

Weak exports and uncertain global economic environment, partially offset by recent months' results, affected the government's core machine order forecast for the third quarter of 2012, reflecting a 4.8% year over year and 1.2% sequential decline.

According to the IMF, the Japanese economy is projected to grow 2.4% in 2012 and 1.5% in 2013.

Emerging Nations

China and India, the two major emerging/developing nations, are expected to show signs of tangible growth in the years ahead. However, near-term conditions in these economies are weak. According to the IMF, the Chinese economy is projected to grow 8.0% and 8.5% in 2012 and 2013, respectively.

Looser fiscal and monetary measures by the Chinese authorities, efforts of increasing fixed asset investment along the lines of interest rate cut by the Chinese central bank, are expected to offset some of the recent weakness in economic data. Foreign Direct Investments (FDI) flow into the country has slowed and exports have weakened, especially due to slowing global economy while lack of domestic demand for construction, mining and textile machinery contracted imports.

Industrial production in India has been weak in recent months, with the released data showing a bare 0.1% annual growth in July. Poor performances by manufacturing, mining and capital goods sectors reflect weak domestic demand and exports were hurt largely by the European debt crisis. According to IMF, the country is projected to grow 6.1% in 2012 and 6.5% in 2013.

Korea's industrial production increase fell from 1.3% in May to just 0.6% in June and then plummeted 1.6% in July. Weak exports due to global uncertainties, especially the Eurozone crisis, hit the economy hard. Attempts, including interest rate cuts by the central bank of the country, are being made to infuse strength in the economy.

Thailand seems to be recovering fast from the ravages of its floods; reconstruction activities are perceptible in the region to spur demand in the machinery industry. However, weak economic conditions around the globe, especially that of the Eurozone, has impacted growth in the country, as can be seen from the decline in the country's industrial production.

Other Major Players

As per data released by the Brazilian government, economic growth in Brazil remains healthy with projected growth of about 4.0% by the end of 2012 from 2.7% in 2011. Upcoming sporting events to be held in Brazil, rising government spending to improve the country's infrastructure, growing trade relations with other economies, as well as huge foreign direct investments all bode well for the economy. According to the IMF, the country is expected to grow 2.5% in 2012 and 4.6% in 2013.

South Africa is also making progress and is expected to grow 2.6% in 2012 and 3.3% in 2013, as projected by the IMF. The government is focused on improving its mining, manufacturing and agricultural sectors. Moreover, huge public investments in the infrastructure development programs remain in the forefront.

Eurozone - A Hurdle

The Eurozone debt crisis has slowed down the overall growth pace in the region as well as of the global economy. According to a report published by Eurostat in September 2012, industrial production (excluding construction), on a monthly basis, in the Eurozone inched up 0.6% in July 2012 as compared with a fall of 0.6% in June 2012.

On a year-over-year basis, industrial production in July fell 2.3%, including 7.3% fall in Italy, 5.4% in Spain and 5.3% in Greece. However, increase of 18.4% was recorded in Slovakia, 5.3% in Latvia and 5.1% in Ireland.

Construction output, on a monthly basis, fell 0.3% in July and 0.6% in June 2012. On an annual basis, production dropped 4.7% in July, including 18.3% decline in Slovenia, 18.2% in Portugal, 16.1% in Spain and 14.2% in Italy. Offsetting the declines were 7.7% construction output increase in Hungary, 3.0 in Bulgaria, and 2.2% in Germany.

According to the VDMA machine makers association, German machine tool orders in the second quarter of 2012 plummeted 20% year over year, with domestic orders down by 8% and international orders sliding by 26%.

Important Players of the Machinery Industry

Deere & Company (DE) was impressed with its record fiscal third quarter 2012 (ended July 31, 2012) results and fiscal 2012 outlook. Equipment sales rose 16%; and price realization contributed 5%.

The agricultural and forestry equipment provider is expanding globally to leverage benefits from the growing global farm industry. Fiscal year 2012 equipment sales are expected to grow 13% year over year, after netting out 3% unfavorable currency translation impact expected for the year. Net earnings are anticipated to be approximately $3.1 billion.

Caterpillar Inc. (CAT) reported record results in the second quarter 2012. The company's Equipment sales improved 23% year over year. The company raised its 2012 profit per share expectation from $9.50 to $9.60 on better demand forecasts.

Italy-based CNH Global NV (CNH) posted 3% or 9% (constant currency basis) year-over-year increase in its equipment sales -- agricultural and construction -- in the second quarter of 2012. Worldwide agricultural and construction equipment retail demand in 2012 is expected to be flat to down 5%.

Other top players in the agricultural, construction and mining industry includes: AGCO Corporation (AGCO), The Toro Company (TTC), Terex Corp. (TEX) and Kubota Corporation (KUB), among others.

Prime companies operating in machinery industries other than agricultural, construction and mining, include Rockwell Automation Inc. (ROK), Illinois Tool Works, Inc. (ITW), Manitowoc Company, Inc. (MTW), among others.

OPPORTUNITIES

Fiscal government expenditures play a counter-cyclical role curbing the ill effects of slower economic developments and a tight credit market. China has come forward with its structural stimulus package for 2012. Government spending on social welfare, construction of low-cost housing, completion of infrastructure projects on agriculture, forestry and water resources received special attention.

Also, the U.S. Congress had a stimulus package designed in 2009 that had money flowing into infrastructure spending. Also, The American Energy & Infrastructure Jobs Act (H.R. 7) will boost spending in the infrastructure projects. Approximately $260 billion will be allocated to fund roads, bridges and highway projects over five years.

Russia becoming the World Trade Organization (WTO) member in 2012 will open the gates for companies worldwide to benefit from the growing needs for modernizing the agricultural, transport and infrastructure sectors of the economy.

WEAKNESSES

We remain wary of the rising raw material costs of some of the major players of the machinery industry. Steel prices along with energy, especially coal and fuel prices, remain the prime causes of concern.

Research and development costs are on the rise for machine makers in their pursuit of manufacturing more sophisticated and technologically advanced machinery. Availability of funds remains difficult as some major nations are still struggling to bring stability to their own economies.

Favorable commodity prices are a boon, although government policies affecting prices along with export and import policies and trade relations with other countries impact the machinery industry.

Conclusion: Prospects Bright

Despite the prevailing global uncertainties, rising needs of better infrastructure, modernized methods of agriculture and growing complexity of mining/manufacturing methods will boost demand for technologically advanced equipment in those industries. Moreover, looking ahead on the growth path, the emerging and developing nations will inevitably be an attractive destination for machine makers worldwide.
 
AGCO CORP (AGCO): Free Stock Analysis Report
 
CATERPILLAR INC (CAT): Free Stock Analysis Report
 
CNH GLOBAL NV (CNH): Free Stock Analysis Report
 
DEERE & CO (DE): Free Stock Analysis Report
 
ILL TOOL WORKS (ITW): Free Stock Analysis Report
 
KUBOTA CORP ADR (KUB): Free Stock Analysis Report
 
MANITOWOC INC (MTW): Free Stock Analysis Report
 
ROCKWELL AUTOMT (ROK): Free Stock Analysis Report
 
TEREX CORP (TEX): Free Stock Analysis Report
 
TORO CO (TTC): Free Stock Analysis Report
 
To read this article on Zacks.com click here.