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AGCO (AGCO) Poised for Growth Amid Weak Industry Demand

Zacks Equity Research

On Feb 21, we issued an updated research report on AGCO Corporation AGCO.

After posting strong fourth-quarter 2016 results, AGCO projects its gross and operating margins to improve in 2017 from the 2016 level, reflecting positive impact of cost-reduction efforts. The company has guided 2017 earnings per share to come in at approximately $2.50.

AGCO intends to increase the level investment to execute its product development plans, resulting in increased capital expenditure and engineering spend in 2017. Its spending plan in 2017 will support long-term growth of business. In addition, as a result of the solid free cash flow that AGCO generated over the last few years, its balance sheet and liquidity position remain strong. The company targets free cash flow of $225–$250 million in 2017.

In Brazil, stabilization of the government and financing program in recent months has led to improved demand. The Argentina market improved in 2016 as more farmer-friendly government policies and healthy crop production stimulated demand. Further, the South American industry forecast for 2017 assumes growth of approximately 10%.

In addition, the company remains focused on cost and expense reduction through globalizing processes, reducing complexity and better leveraging scale. In addition, AGCO will continue to make long-term investment to raise the efficiency of factories, improve service levels and strengthen product offering.

However, AGCO expects its earnings per share in first-quarter 2017 to be significantly lower than reported for first-quarter 2016, primarily due to higher income tax expense. The company is targeting an effective tax rate of approximately 40% for 2017. The increase in the tax rate will significantly impact its first-quarter results, due to the timing in 2016 of accounting change relating to the U.S. deferred tax assets.

In the U.S., the USDA estimates farm income toremain challenging in 2017. Lastly, AGCO anticipates a modest decline in the Western European market. Thus, AGCO's performance will be hurt by weak industry demand for farm equipment.

AGCO currently carries a Zacks Rank #3 (Hold).

Share Price Performance

In the last one year, AGCO has underperformed the Zacks classified Machinery Farm sub-industry with respect to price performance. The stock gained around 35.4%, while the industry rose 40% over the same time frame.



Stocks to Consider

Some better-ranked stocks in the sector include Kennametal Inc. KMT, Chart Industries, Inc. GTLS and II-VI Inc. IIVI. All of these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Kennametal has an earnings ESP of 9.90% for the trailing four quarters. Chart Industrieshas an impressive average earnings surprise of 548.51% for the last four quarters, while II-VI Incorporated has an average earnings surprise of 59.23% for the past four quarters.

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