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AGCO Corp Issues Preliminary 2020 Outlook on Investor Day

Zacks Equity Research

AGCO Corporation AGCO has issued the preliminary outlook for 2020 at its recently-held investor day. The company is poised to gain from margin improvement, investment in products, technology, and a solid capital-allocation plan despite a sluggish market outlook and bleak macro-economic scenario.

Investment to Spur Growth
 
AGCO is consistently making strategic investments to enhance and expand its product lines, upgrade system capabilities and improve factory productivity. It intends to increase the investment level, in a bid to execute its product-development plan and meet the latest emission requirements in Brazil and Europe. Consequently, AGCO expects capital expenditures in 2020 around $253 million, up from the previous year’s $228 million. Its spending plan in the current year will support long-term business growth and new product initiatives.

Strategic Acquisitions Boost Growth

AGCO continues to strengthen product offerings and expand geographic reach through acquisitions. The company has completed two acquisitions in the last two years. In September 2017, it acquired Precision Planting — a leader in innovative planting technology. AGCO is focused on growing Precision Planting business with global expansion of the products and continued innovation of new technology. Also, the company’s innovative approach is enhancing its smart farming technologies.

Later in October that year, AGCO purchased the forage division of Lely Group, which significantly boosted its hay and forage product line in Europe, fueling growth in this market.

Financial Updates

The company is focused on its long-term capital-allocation plan by returning cash to shareholders. During 2014-2019, the company executed share repurchases of $1.3 billion, which reduced share count by more than 25%. In the first nine months of 2019, it repurchased shares worth $100 million. The company projects to generate free cash flow of $325-$350 million for 2020.

AGCO projects its ongoing-year net sales at $9.2 billion, down from the $9.3 billion recorded in 2019. Sales volumes are likely to be affected by lower end-market demand and negative foreign currency-translation impact. However, positive impact of pricing and market-share gains are likely to offset these negatives.
 
Despite lower sales volume, operating margin in the current year is expected to range from flat to up, driven by AGCO's productivity and purchasing initiatives. Considering these, adjusted earnings per share (EPS) is expected in the band of $5.00-$5.20. Further, the company is focused on margin expansion backed by the positive impact of pricing and benefits from cost-reduction initiatives.

Reduced Market Outlook

Industry retail sales in South America might be hurt by a bleak macro-economic scenario in Brazil and weak demand in Argentina. Furthermore, industry retail sales in Western Europe and North America will likely be thwarted by soft industry demand. AGCO believes farm income in the current year will remain under pressure.

This apart, the U.S Agriculture industry has been grappling with low commodity prices and sluggish farm incomes. Tariffs imposed by China on U.S. agricultural exports last year were a severe blow, given that the former is the largest export market for U.S. agriculture producers. This, along with late planting and slow crop development, has made farmers more cautious about spending on farm equipment.

Share Price Performance

AGCO’s shares have appreciated 29.7% over the past year, outperforming the industry’s growth of 14.2%.


 
Zacks Rank & Stocks to Consider

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

Some better-ranked stocks in the Industrial Products sector are Cintas Corporation CTAS, Chart Industries, Inc. GTLS and DXP Enterprises, Inc. DXPE, each carrying a Zacks Rank #2 (Buy), at present. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Cintas has an expected earnings growth rate of 15.6% for the current year. The stock has gained 56% over the past year.

Chart Industries has a projected earnings growth rate of 73.6% for 2020. The company’s shares have gained 6% over the past year.

DXP Enterprises has an estimated earnings growth rate of 10.5% for the ongoing year. In a year’s time, the company’s shares have appreciated 37.3%.

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