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AGCO Bets on Strategic Investments Amid High Steel Prices

Zacks Equity Research

On Mar 1, we issued an updated research report on AGCO Corporation AGCO. The company is likely to benefit from its focus on strategic investments and capital-allocation plan. However, lower farm income, rising steel prices and currency fluctuations are concerning.

Let’s illustrate these factors.

Strategic Investments Support AGCO

AGCO is consistently making strategic investments to enhance and expand product lines, upgrade system capabilities and improve factory productivity. In a bid to execute its product development plan and meet new emission requirements in Brazil and Europe, the company intends to maintain its level of investment in 2019. As a result, AGCO expects capital expenditures in 2019 to increase approximately above $25 million compared with the 2018 level. Notably, its spending plan for the current year will support long-term business growth.

Upbeat Guidance
 
AGCO has reaffirmed its net sales 2019 outlook at $9.6 billion owing to improved sales volumes and positive pricing. It anticipates gross and operating margin to improve from the 2018 level backed by positive impact of pricing and cost reduction. Considering these, the company expects 2019 earnings to come in around $4.60 per share.

Additionally, AGCO expects industry demand in South America to improve in 2019 from the 2018 level. Backed by favorable wheat prices and crop production, farm economics are expected to improve modestly across Western Europe in the current year leading to relatively stable demand in European markets.

Acquisitions to Boost Growth

AGCO completed two acquisitions in the last two years. In September 2017, it acquired Precision Planting — a leader in innovative planting technology. In October 2017, AGCO purchased the forage division of the Lely Group, which will significantly enhance hay and forage product line in Europe and drive growth in this market.

AGCO’s Solid Capital-Allocation Plan
 
AGCO is focused on its long-term capital allocation plan by returning cash to its shareholders. Over the past six and a half years, the company executed share repurchases of $1.2 billion, which reduced share count by more than 20%. Last year, it completed share repurchase worth $184 million and expects to continue share repurchases in 2019 as well.
 
AGCO also aims to generate solid free cash flow during the current year.

Weak Farm Income in the United States to Hurt AGCO

Farm income remains under pressure due to lower commodity prices. In the United States, the USDA estimates a modest decline in farm income during 2019 compared with the 2018 level. Moreover, higher retail sales in Brazil are expected to be offset by lower sales in Argentina during the current year due to the impact of lower crop production.

Higher Steel Prices & Currency Headwind Ail

AGCO’s results will be affected by rising steel prices due to tariffs imposed by the U.S. government. The company also expects currency translation to negatively impact sales by 2.5% in 2019.

Share Price Performance
 
Shares of AGCO have gained 4.90% in a year’s time, outperforming the S&P 500’s 3.04% increase.
 
Zacks Rank & Stocks to Consider
 
AGCO currently carries a Zacks Rank #3 (Hold).
 
A few better-ranked stocks in the Industrial Products sector are Mueller Industries, Inc. MLI, Alarm.com Holdings, Inc. ALRM and Albany International Corp. AIN, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
 
Mueller Industries has an expected earnings growth rate of 2.2% for 2019.
 
Alarm.com has an expected earnings growth rate of 7.8% for the current year.
 
Albany International has an expected earnings growth rate of 44.7% for 2019.

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