On Jan 22, we issued an updated research report on AGCO Corporation AGCO. The company’s focus on strategic investments, acquisitions and capital-allocation plan will drive growth. However, results may be affected by low commodity prices, rising steel prices and elevated expenses.
Let’s illustrate these factors.
Strategic Investments Support AGCO
AGCO continues to make strategic investments to refresh and expand product lines, upgrade system capabilities and improve factory productivity. The company expects capital expenditures to increase around $50 million in 2018 which will be used primarily to execute product development plan and meet new emission requirements. Its spending plan for the current year will support long-term business growth.
Acquisitions to Boost Growth
In September 2017, AGCO acquired Precision Planting — a leader in innovative planting technology. AGCO’s purchase of Lely Group’s forage division has significantly enhanced its hay and forage product line in Europe. Acquisitions accounted for approximately 3% of the net sales increase in third-quarter 2018 and will likely increase sales by about 2.5% in 2018.
AGCO Grows on Capital-Allocation Plan
AGCO is focused on its long-term capital allocation plan by returning cash to shareholders. In the past four years, the company has executed share repurchases of $1 billion, which had the effect of reducing share count by 20%. It has an existing $300-million program authorized. Through Sep 30, 2018, AGCO has spent about $84 million on share repurchases. The company expects to continue share repurchases in fourth-quarter 2018. It also targets to generate solid free cash flow for 2018.
Weak Farm Income to Hurt AGCO
Farm income remains under pressure due to lower commodity prices. In the United States, the USDA estimates that farm income will be down 12% to $66 billion. This is a concern for AGCO.
Elevated Expenses to Dent Earnings
AGCO’s results will be affected by rising steel prices due to tariffs imposed by the U.S. government. In addition, engineering expenses are expected to increase by around $45 million year over year in 2018 compared with 2017. These factors are likely to hurt earnings.
Share Price Performance
Over the past year, AGCO stock has depreciated around 13.9% while the industry has recorded a loss of 5.4%.
Zacks Rank & Key Picks
AGCO carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the Industrial Products sector include Axon Enterprise, Inc. AAXN, Bemis Company, Inc. BMS and EnerSys ENS. While Axon flaunts a Zacks Rank #1 (Strong Buy), Bemis and EnerSys carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Axon has an expected earnings growth rate of 14.5% for 2019. The company’s shares have rallied 79% over the past year.
Bemis has an expected earnings growth rate of 7.4% for 2019. The stock has gained 2.1% in a year’s time.
EnerSys has an expected earnings growth rate of 9.5% for 2019. Its shares have climbed 14.2% in the past year.
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