Alamo's Investment Appeal Rises On Solid Growth Potential

We find Alamo Group, Inc. ALG a solid choice for investors seeking exposure in the machinery space. The agriculture and infrastructure equipment manufacturer and supplier has solid growth prospects driven by improving domestic and global economic backdrop, initiatives undertaken for improvement of operational initiatives and synergistic benefits from acquired assets.

The stock, currently with $1.3 billion market capitalization, has been upgraded to a Zacks Rank #2 (Buy) on Dec 26. Its investment appeal is further accentuated by a favorable VGM Score of B.

Below we discuss why investors should consider buying Alamo Group’s stock.

Why the Upgrade?

Market sentiments have been positive for Alamo Group, with the stock yielding 50.8% return year to date compared with 47.1% growth of the industry. Also, the company delivered better-than-expected results in two of the first three quarters of 2017 while recording in line results in one. In the last reported quarter, the company pulled off a positive earnings surprise of 12.90%. The stock price has increased 8.7% since the earnings announcement on Oct 31.

Also, the stock’s earnings estimates for both 2017 and 2018 have been raised by two brokerage firms. Currently, the Zacks Consensus Estimate is pegged at $4.49 for 2017 and $5.05 for 2018, representing growth of 7.7% and 11.7% from their respective tallies 60 days ago.

Alamo Group, Inc. Price and Consensus

Alamo Group, Inc. Price and Consensus | Alamo Group, Inc. Quote

We believe that machinery stocks in the United States will gain traction from a strengthening domestic economy and healthy global growth backdrop. Continuous advancements in technologies applied in agriculture industry will keep demand strong for farming machineries while rise in demand for better infrastructure and residential and non-residential spaces will increase need for heavy construction machineries. In addition, the Trump government’s promised growth policies, especially the proposed $1 trillion spending on infrastructure improvement, will substantially improve growth prospects of machinery companies. Moreover, demand for U.S.-manufactured machineries remains high, with new orders increasing 7.1% in the first 10 months of 2017. Per the U.S. Census Bureau report, orders were solid for construction, mining, industrial, material handling and other machineries.

Further, Alamo’s diversified product portfolio, its solid network of more than 6,000 dealers and distributors and huge customer base across various industries including government, agricultural, commercial turf, industrial and others will prove beneficial. Also, the company has prioritised initiatives like consolidation of manufacturing locations, focus on technologically advanced equipment to lower input costs and leveraging benefits from group purchasing initiatives to improve its operating efficiencies. Other initiatives undertaken include ensuring reduced lead times, improving assets usage and enhancing manufacturing efficiencies. Acquisitions have also been one of the ways for Alamo to expand its business scope. Year to date, the company has acquired Virginia-based Old Dominion Brush Company, Inc., Brazil-based Santa Izabel Agro Industria, Ltda. and Canada-based R.P.M. Tech Inc.

Other Stocks to Consider

Some other stocks worth considering in the machinery industry are Deere & Company DE, H&E Equipment Services, Inc. HEES and Caterpillar, Inc. CAT. While Deere & Company sports a Zacks Rank #1 (Strong Buy), both H&E Equipment and Caterpillar carry a Zacks Rank of 2.  You can see the complete list of today’s Zacks #1 Rank stocks here.

Deere delivered an average positive earnings surprise of 19.52% in the trailing four quarters. Also, earnings estimates for fiscal 2018 and fiscal 2019 improved in the past 60 days.

H&E Equipment Services pulled off an average positive earnings surprise of 34.66% in the last four quarters. Also, earnings estimates for 2017 remained stable while that for 2018 improved in the last 60 days.

Caterpillar’s financial performance was impressive, with an average positive earnings surprise of 53.06% in the last four quarters. Also, earnings estimates for 2017 and 2018 were revised upward in the last 60 days.

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