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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