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AGCO or Lincoln Electric: Which Stock Is More Enticing Now?

Industrial production, a measure of output at factories, mines and utilities, and one of the leading economic indicators for the industrial stocks, rose at an annual rate of 1.5 % in first-quarter 2017. The momentum continues in the second quarter with U.S. industrial production logging growth of 1.1% in April compared with March, marking its biggest gain since Feb 2014. Industrial production remained unchanged in May compared with April.

The industrial products sector (one of the 16 broad Zacks sectors) also put up a 28.5% growth in earnings in first-quarter 2017 and 11.9% growth in earnings is projected in second-quarter 2017. The Industrial Products sector is one of the three sectors projected to log a double-digit growth in the second quarter. (Read more: Taking Stock of the Earnings Picture)

Economic indicators are indicating a healthy business environment for the industrial sector. Government policies encouraging better trade relations along with increase in infrastructural investments, job creation and high consumer-end demand will support growth going ahead. Trump administration’s plan to invest significantly in the country’s infrastructure, if implemented, will boost growth of the industrial sector.

Thus, the industrial products sector is currently enjoying a Zacks Sector Rank of 4, which puts it in the top 25% of the 16 sectors in our coverage. In the past one year, the industrial products sector has clocked a gain of 28.8%, ahead of the S&P 500’s climb of 17.3%.
 

In this context, we focus on two industrial stocks, AGCO Corp. AGCO and Lincoln Electric Holdings, Inc. LECO. AGCO is a leading manufacturer and distributor of agricultural equipment and related replacement parts with a market capitalization of $5.40 billion. Lincoln Electric is a manufacturer and reseller of welding and cutting products with a market capitalization of $6.06 billion.

While both the stocks carry a Zacks Rank #2 (Buy), it will be interesting to see which stock is better positioned in terms of fundamentals. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Other top-ranked stocks in the same industry that are worth considering include Deere & Company DE sporting a Zacks Rank #1 and Alamo Group, Inc. ALG, carrying a Zacks Rank #2.

Price Performance



In the last year, the Machinery industry has witnessed an increase of 38.8% while the industrial products sector rose 25.1%. Both Lincoln Electric and AGCO have outpaced the industry and the sector with a respective 59.4% and 45.4% surge. This round goes to Lincoln Electric without a question.

Valuation

The EV/EBITDA metric is usually used to compare two stocks within the same industry or sector and has an edge over other metrics such as P/E because it is not affected by the different capital structures of the two companies.



Compared with machinery industry’s EV/EBITDA ratio of 12.42, Lincoln Electric is over-priced, with a reading of 16.36. Meanwhile, AGCO is much cheaper with a trailing 12-month EV/EBITDA of 10.59. Clearly, AGCO is cheaper in terms of valuation.

Inventory Turnover Ratio

In the last year, the inventory turnover ratio for AGCO and Lincoln Electric has been 3.48% and 5.39%, respectively, compared with the machinery industry’s level of 3.88%.

Lincoln Electric’s higher inventory turnover than the industry average means that inventory is sold at a faster rate, suggesting inventory management effectiveness. Further, a high inventory turnover rate means less company resources are tied up in inventory and it is able to manage inventory effectively to generate revenues and avoid wastage. Clearly, Lincoln Electric has scored better on this front.


Return on Assets

Return on assets (ROA) is one of the key financial ratios for industrial companies as they rely heavily on inventory to create revenues. An above-average ROA denotes that the company in question is generating earnings by effectively managing assets.



AGCO and Lincoln Electric’s ROA for the trailing 12-months (TTM) is 2.79% and 11.97%, respectively. Lincoln Electric has scored above the industry’s level of 4.29% while AGCO falls short. This round belongs to Lincoln Electric.

Dividend Yield



In the last one-year period, AGCO’s dividend yield was pegged at 0.82% while Lincoln Electric’s is higher at 1.51%.  Though both have a dividend yield lower than the machinery industry’s dividend yield of 1.66%, on a comparative basis, Lincoln Electric scores better.

Debt- to- Capital



Both Lincoln Electric and AGCO have lower debt-to-capital ratio of 47.36% and 39.65% respectively compared with the industry average of 68.45%. However, AGCO holds an edge here.

Earnings Performance in the Last Quarter

AGCO reported an adjusted loss of $0.02 per share in first-quarter 2017, as against earnings of $0.11 per share recorded in first-quarter 2016. The loss reported in the quarter was, however, narrower than the Zacks Consensus Estimate of a loss of $0.17.

Lincoln Electric reported earnings of $0.88 per share in first-quarter 2017, up 16% year over year. Earnings also surpassed the Zacks Consensus Estimate of $0.79.

Earnings Surprise History

Taking a look at both the companies surprise history, AGCO has outpaced the Zacks Consensus Estimate in all the four trailing quarters, with an average positive earnings surprise history of 40.39%. Meanwhile, Lincoln Electric has delivered positive earnings surprises in the trailing four quarters, generating an average positive earnings surprise of 4.66%.

Earnings Estimate Revisions, Growth

On one hand, earnings estimates for Lincoln Electric have gone up 0.3% for fiscal 2017 and 0.2% for fiscal 2018 in the past 60 days. On the other hand, estimates for AGCO have gone up 0.7% and 1.8%.

AGCO’s fiscal 2017 earnings estimates reflects a year-over-year growth of 12.06% while the  fiscal 2018 earnings estimate reflects a year-over-year growth of 23.69%. Lincoln Electric’s earnings estimates for fiscal 2017 and fiscal 2018 depict a projected growth of 11.69% and 9.59%, respectively. AGCO has expected earnings per share growth rate of 12.41%, much higher than Lincoln Electric’s 9.90. AGCO is a clear winner here.

Conclusion

Our comparative analysis shows that Lincoln Electric holds an edge over AGCO when considering price performance, profitability, inventory turnover and dividend yield. However, when considering valuation, leverage, earnings surprise history and earnings growth projections, AGCO seems to be the preferred stock. Since the scales are balanced, both these Zacks Rank #2 stocks would make great additions to your portfolio.

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Lincoln Electric Holdings, Inc. (LECO): Free Stock Analysis Report
 
Deere & Company (DE): Free Stock Analysis Report
 
AGCO Corporation (AGCO): Free Stock Analysis Report
 
Alamo Group, Inc. (ALG): Free Stock Analysis Report
 
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