AGCO Shows Stability on Fundamentals


On Apr 3, 2014, we issued an updated research report on AGCO Corporation (AGCO). This manufacturer of agricultural equipment reported fourth-quarter 2013 adjusted earnings of $1.40 per share, which improved 41% year over year and came ahead of the Zacks Consensus Estimate.

The company remains committed to its plans of expanding in the Commonwealth of Independent States (CIS), China and Africa. Last year, AGCO entered into a 50-50 joint venture (:JV) with Russian Machines to manufacture and distribute agricultural equipment and replacement parts in Russia.

Further, the company plans to invest in production facilities in China over the next 15 years. AGCO intends to widen its presence in Africa and has $100 million of investment in pipeline for the coming years.

Additionally, the company’s efforts to enhance shareholders’ value was evident when a 10% hike in the quarterly payout was announced in Jan 2014. Moreover, AGCO increased its share repurchase program to $500 million, which will likely be complete over the next 18 months. The company will continue investing for driving growth and profitability with additional investments in plants and new products. It will also target another strong year of solid free cash flow for 2014.

For 2014, AGCO expects GSI sales to be up 10%–15% from 2013, with most of the growth occurring outside the U.S. The countercyclical nature of the protein production sector supports more stable earnings in GSI. In the long term, an increase in the world’s population and change in diet are expected to create demand for additional grain storage and protein production capacity.

However, AGCO reiterated its full-year 2014 earnings per share guidance of $6.00, which reflects a 0.2% year-over-year dip. The company also cautioned that a fall in commodity prices in 2014 as compared to 2013 will lead to reduced farm income and softer industry demand across the developed agricultural equipment markets. AGCO is projecting net sales in the range of $10.8 billion to $11.0 billion for 2014, relatively flat as compared with 2013. The guidance includes the impact of softer market conditions.

In addition, product demand is expected to fall in the near term due to decrease in farm income and crop prices as well as a less favorable renewable fuel standard (:RFS). Notably, the RFS is likely to drag the demand for corn, thereby lowering the need for agricultural equipment as well. The company also anticipates rise in market development expenses and engineering expenditures (for meeting Tier 4 final emission requirements) to continue weighing on margins.

Furthermore, the absence of an extension of current depreciation tax benefits beyond 2013 (in the U.S.) and potential FINAME borrowing cost increases (in Brazil) could pressure AGCO’s earnings.

AGCO currently carries a Zacks Rank #4 (Sell).

Other Stocks to Consider
Some better-ranked machinery makers worth consideration include Alamo Group, Inc. (ALG), Broadwind Energy, Inc. (BWEN) and Altra Industrial Motion Corp. (AIMC). All of these have a Zacks Rank #2 (Buy).

Read the Full Research Report on AGCO
Read the Full Research Report on AIMC
Read the Full Research Report on ALG
Read the Full Research Report on BWEN

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