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AGCO Corp (AGCO) Rides on Farm Equipment Demand Amid Cost Woes

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On May 19, we issued an updated research report on AGCO Corporation AGCO. The company will benefit from higher agricultural commodity prices that will likely spur agricultural equipment demand in the near term. Improved industry demand as well as focus on investment in precision agriculture will also continue to aid growth. However, inflated costs might dent the company’s margin.

AGCO Corporation delivered adjusted earnings per share of $2.00 in first-quarter 2021 compared with the prior-year quarter’s 86 cents. The reported figure beat the Zacks Consensus Estimate of $1.11 as well. Revenues of $2,379 million increased 23.4% year over year and topped the Zacks Consensus Estimate of $2,215 million.

Higher Commodity Prices to Spur Farm Equipment Demand

Global commodity prices have regained footing after declining significantly in the earlier part of 2020 amid the pandemic. This turnaround was aided by favorable farm economics and elevated demand for machinery. Improved commodity prices will boost farm income, encouraging farmers to resume spending on agricultural equipment.

Replacement Demand to Aid Growth

The company expects the North American industry sales to trend higher this year on escalating commodity prices and improved farmer sentiment. Further, the need to replace an ageing fleet with technologically-advanced equipment will drive demand. In European Union (EU) farming, positive farm economics and higher commodity prices are likely to support healthy demand from the arable farming segment. Industry demand in Western Europe is anticipated to be strong and grow modestly in 2021. Elevated commodity prices and favorable exchange rates will likely fuel growth in South America during 2021 as farmers continue to replace aged equipment.

Upbeat View on Improved Farm Dynamics

AGCO expects sales and earnings growth in the current year to gain on improving industry conditions. The company projects net sales for the ongoing year to lie between $10.6 billion and $10.8 billion, up from the prior forecast of $10.2 billion to $10.4 billion. The upbeat guidance suggests improved sales volumes, pricing and positive impacts of foreign-currency translation. Considering these, AGCO estimates adjusted earnings per share for the current year in the range of $8.40 to $8.60, up from the prior projection of $7.00 to $7.25.

Investments to Fuel Growth

AGCO continues to invest in products, premium technology and smart farming solutions to improve distribution and enhance digital capabilities in order to drive margins and strengthen product offerings. These improvements will aid AGCO’s investments in precision agriculture and digital initiatives. The company also continues to make investments to upgrade system capabilities, expand product lines and improve factory productivity.

However, there are few factors that might impede the company’s growth.

AGCO Corporation is facing significant challenges with supply chain as capacity constraints and pandemic-induced disruptions continue to impact its performance. Moreover, engineering expenses might shoot up by $50-$60 million in 2021 compared with 2020, as the company is investing in smart farming and Precision farming products.

Share Price Performance

Over the past year, AGCO’s stock has appreciated 173.1%, outperforming the industry’s growth of 155.3%.

Zacks Rank and Other Stocks to Consider

AGCO Corporation currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Other similarly-ranked stocks in the Industrial Products sector include Deere & Company DE, Avery Dennison Corporation AVY and Caterpillar Inc. CAT.

Deere has a projected earnings growth rate of 84.2% for fiscal 2021. Shares of the company have soared 154.4% over the past year.

Avery Dennison has an estimated earnings growth rate of 20.8% for 2021. The company’s shares have rallied 112% in a year’s time.

Caterpillar has an expected earnings growth rate of 45.6% for the ongoing year. Over the past year, the stock has appreciated 131%.

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