AGCO Q3 Earnings Lag Y/Y, Shares Dip on Weak Outlook

Shares of agriculture machinery manufacturer, AGCO Corporation (AGCO) dropped 1.5% after it reported a 44% year-over-year decline in its third-quarter 2014 earnings to 71 cents per share on Oct 28. However, earnings surpassed the Zacks Consensus Estimate of 63 cents per share. Weaker markets, significant production cuts aimed at controlling the Company and dealer inventories, declines in commodity prices and expectations of lower farm income in 2014 have negatively impacted AGCO’s results.

Including restructuring and other infrequent expenses, earnings in the reported quarter stood at 69 cents compared with $1.27 in the year-ago quarter.

Agco Corporation - Earnings Surprise | FindTheBest

Operational Update

In the reported quarter, AGCO’s revenues decreased 13% to $2.2 billion from $2.48 billion in the year-ago quarter. Revenues beat the Zacks Consensus Estimate of $2.08 billion. Excluding a favorable currency translation impact of around 0.7%, net revenue dropped approximately 12.3%.

Cost of sales declined 10% to $1.73 billion from $1.92 billion in the year-ago quarter. Gross profit was $421.9 million in the quarter, down 24% from $556 million in the prior-year quarter. Gross margin was 19.6%, a 290 basis point contraction year over year.

Selling, general and administrative expenses amounted to $222 million, declining 14% from the year-ago quarter. Segment income from operations decreased 44% year over year to $111.6 million. Consequently, operating margin contracted 280 bps to 5.2%.

Segment Performance

Sales in the North America segment declined 22.6% year over year to $531.32 million in the quarter. The segment’s income from operations fell 52% year over year to $37.3 million.

Sales in the South America segment fell 20.5% year over year to $455 million. Income from operations for the segment decreased 49% year over year to $36.4 million.

The EAME (Europe/ Africa/ Middle East) segment’s sales were $1,026 million, down 5.6% from the year-ago quarter. EAME’s operating income reduced 42% year over year to $57 million.

Sales in the Asia/Pacific segment increased 9% year over year to $143 million from $131 million a year ago. The segment, however, reported a loss from operations of $1 million, narrower than the year-ago quarter’s loss of $2.6 million.

Financial Update

AGCO ended the third quarter with cash and cash equivalents of $321 million, down substantially from $1047.2 million as of 2013-end. Cash used in operating activities for the period of nine months ended Sep 30, 2014 was $215 million compared with cash flow from operations of $169 million in the year-ago period.

Long-term debt was $1.33 billion as of Sep 30, 2014, compared with $938 million as of Dec 31, 2013. The debt-to-capitalization ratio was 27.3% as of Jun 30, 2014 compared with 23.6% as of Dec 31, 2013.

During the first quarter, AGCO entered into accelerated repurchase agreements (“ASRs”) with a financial institution to repurchase an aggregate of $290.0 million of shares of its common stock. AGCO has received approximately 5,389,119 shares during the nine months ended Sep 30, 2014 related to these ASRs. Additionally, during the third quarter, AGCO repurchased 1,049,376 shares of its common stock for approximately $50.9 million at an average price paid of $48.46 per share. The company has approximately $190.5 million remaining under its previously authorized share repurchase program of $550 million.

Guidance

AGCO believes that the global industry demand will continue to soften in 2014 in comparison with 2013. The company anticipates declines across all major global agricultural markets, particularly in the row crop segment. AGCO projects earnings for 2014 to range between $4.10 and $4.30 a share on the back of net sales in the range of $9.5 billion to $9.7 billion. The negative impact of lower sales and production volumes on gross margins are expected to be partially offset by cost reduction initiatives.

Duluth, GA-based AGCO is a global leader in the design, manufacture and distribution of agricultural machinery. It supports productive farming through a wide range of tractors, combines, hay tools, sprayers, forage equipment, tillage, implements, grain storage and protein production systems as well as other related replacement parts.

Peer Performance

Caterpillar Inc. (CAT) reported a 15% increase to $1.72 per share in its third-quarter adjusted earnings, surpassing the Zacks Consensus Estimate of $1.33 for a positive earnings surprise of 29%.

Currently, AGCO has a Zacks Rank #5 (Strong Sell). Some better-ranked stocks in the sector include Briggs & Stratton Corp. (BGG) and Alamo Group, Inc. (ALG). While Briggs & Stratton sports a Zacks Rank #1 (Strong Buy), Alamo Group holds a Zacks Rank #2 (Buy).

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