We believe the Machinery group is structurally better positioned than any time in their history. Higher margin highs over two decades, exceptional income preservation during a lethargic and choppy 2010-2019 period and nimbleness navigating the 2020 pandemic all accentuate this point. Aftermarket and services have become a larger portion of revenue. Earnings streams are more geographically diverse. Capital decisions are more thoughtful. Free cash flow resilient. Costs more flexible. Distribution and dealer channels have become more rational and disciplined, driving less erratic results. Finally, the sophistication of technology embedded within the machines and new equipment is enabling greater customer intimacy, in turn, driving shorter trade cycles. First time buyers are now seeking to flip equipment after only 2-3 years of ownership to trade up for disruptive technologies, software and a much more productive solution. Collectively, this is producing a higher quality earnings stream, which will catalyze the upturn. An eventful 2020 ended with the Machinery group pushing to new record highs along with the broader equity market, riding hopes that COVID vaccines, a decided U.S. presidency and expected U.S. fiscal stimulus would finally help the dust settle following months of economic uncertainty. We think the setup for 2021+ looks quite positive to us with a confluence of positives including an ongoing economic recovery, vaccination rollouts, rising commodity prices, resolution of Brexit, a weaker dollar and an aging fleet in a number of markets. We believe the current machinery up-cycle is only in the early innings.

Top Picks:

  • Deere & Company (DE)
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