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AGCO Corporation (AGCO), Alamo Group, Inc. (ALG): Do These Machinery Stocks Have Value to Dig Up?

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Farming and construction machines are critical to keeping society functioning, and that’s a powerful moat. While they’re essential, unfortunately they can also be finicky stocks because they’re vulnerable to commodity price changes. Let’s see how the following companies stack up.

Global goodness

AGCO Corporation (NYSE:AGCO)
AGCO Corporation (NYSE:AGCO) operates as a manufacturer, distributing its hardware through independent distributors around the world. This is good because it takes away the challenges of dealing directly with consumers and because it allows operation in a diverse set of marketplaces. The company is earning a modest 5.2% profit margin, and it trades for a reasonably cheap 9.8 times earnings. AGCO Corporation (NYSE:AGCO) even pays a slight 0.8% dividend — about comparable to today’s savings accounts, at least.

With a history of well over a century in the farm business and several internationally renowned brands, AGCO Corporation (NYSE:AGCO) seems to have what it takes to keep on going. The only major challenge I can see is that the company’s marketplace of farmers is dominated by large conglomerate enterprises that may be more inclined to follow trends than to do what’s most effective. That is, if one large agricultural company chooses to use a competitor’s machinery, many others could follow suit and deprive AGCO Corporation (NYSE:AGCO) of market share en masse.

Overall, I consider AGCO Corporation (NYSE:AGCO) a good investment with a low risk of heading south.

Mature markets and small prospects

Alamo Group, Inc. (NYSE:ALG) takes a more concentrated approach than AGCO Corporation (NYSE:AGCO) does, focusing far more of its resources on Europe. With dozens of regionally identifiable brands, Alamo Group, Inc. (NYSE:ALG) is well integrated into both the European and American markets, which are some of the most major food and cash crop producers in the world. Since Europe and the US are leading the charge toward using crop-based biofuels, there is also a lot of demand for the equipment that Alamo Group, Inc. (NYSE:ALG) produces.

Of course, there are some problems here. Alamo Group, Inc. (NYSE:ALG) is not trading too cheaply at around 16 times its earnings, and the company’s profit margins are a rather paltry 4.6%. The 0.7% dividend yield is also nothing special, making one wonder why the company bothers to divert cash that could be used for growth. This could be valuable cash being tossed away because Alamo Group, Inc. (NYSE:ALG) is a $473 million company, which gives it plenty of room to expand. While biofuels provide a great potential future, the US and Europe are very well established markets that need little expansion, and thus not much equipment.

Overall, I would recommend giving Alamo Group, Inc. (NYSE:ALG) a pass until it either drops into the under-10 P/E range or grows to a larger market cap with earnings to justify that growth.

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