Tuesday, July 1, 2014


AGCO Corp manufactures and distributes agricultural equipment and related replacement parts. Its product mix includes tractors, combines, hay tools, grain storage, etc…  AGCO’s products are under the Challenger, Fendt, Massey Ferguson, Valtra and GSI brands. Their products are distributed in more than 140 countries.
AGCO has maintained a five year revenue growth rate of 12.90% while also having a five year EBITDA growth of 31.60%. This large EBITDA growth was achieved by an improving gross margin over the past five years increasing from 19.18% in 2009 to 22.14% TTM. However this margin is lacking to competitor Deere & Co. (DE) which operates with a 31.90% TTM gross margin.  AGCO has had a huge increase in net earnings over the past 5 years increasing from $135.7 million in 2009 to $578.8 million TTM.

While looking at their balance sheet they are currently holding $193.9 million in cash and have been increasing inventories that have been following their increased net earnings. They have been borrowing more over the past five years; in 2009 they had $454 million in LT debt while they were measured at having $1.0143 billion in the latest quarter (Q1 2014). However this amount of debt can be covered with the 4.397 billion in current assets giving AGCO a current ratio of 1.60. This is not at the preferred ratio of current assets/ liabilities (2:1) and is weaker than the industry average (1.95).  AGCO has been retaining earnings and has seen a 5 year growth rate of 23.45% and has also been growing the total equity of the company (5 year growth rate of 13.8%).  AGCO has a relatively strong balance sheet however they are lacking in their current ratio however this is not much of a problem for the company because they are not highly leveraged (debt/equity ratio of 0.33) as large competitor Deere & Co. (debt/equity of 3.40).
AGCO trades at a P/E of 9.59 compared to the industry which trades at an average P/E of 16.08. They are closer to their 5 year P/E low (7.23) than their P/E high (22.43).

(Source: Finviz.com)

2014 will be a difficult year for AGCO, agricultural commodity prices have declines for much of the past year which translates into lower profits for companies like AGCO. Also according to a pole of farmers around 40% of the respondents reported they would purchase no farm machinery in 2014 (http://www.agweb.com/article/farmers_not_shopping_for_machinery_NAA_Sara_Schafer/). Farmers are less eager to purchase machinery this year with changes to the tax law section 170 which allows for an immediate income write-off for any business asset purchase (new or used) made during that calendar year. The write-off was at an all-time high of $500,000 in 2013, but now it is set at only $25,000 for 2014 (http://www.section179.org/). This will be a factor in farmers not buying new machinery in 2014 which will affect AGCO’s revenue stream.

In the company earnings report the management acknowledged that they were and will be facing challenging markets in 2014. They have said that they will be focusing on margin improvement by efforts on increasing productivity and reducing material costs throughout operations to offset market headwinds. Weaker demand in Brazil hurt their South America margins, sales were negatively impacted by dry weather conditions and also weaker demand from sugar producers. AGCO’s management is expecting production volume to be down 10-15% in the second quarter on a year-over-year basis. For the full year they are planning a decrease of approximately 5% compared to 2013. Target 2014 earnings are approx. $6 per share (down from $6.14 EPS in 2013)

Despite market headwinds AGCO has been returning value to company shareholders by significantly expanding their share repurchase program to $500 million. The lower share count has positively affected EPS by approx. $0.03.

There are very low expectations on AGCO in 2014 and that could be mean it could fall to very appealing levels especially if they are successful in increasing margins. I would wait on AGCO and see if they are successful on increasing their margins while facing market headwinds, if so they would be an attractive long-term buy. 

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