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AGCO Corp. Retained at Outperform

Zacks Equity Research

We reiterate our Outperform recommendation on AGCO Corporation (AGCO), following its forecast-topping first-quarter 2012 results. The company’s first quarter earnings of $1.21 per share surpassed the Zacks Consensus Estimate of 86 cents. Revenues increased 26.5% year over year to $2.27 billion, beating the Zacks Consensus Estimate of $2.08 billion.

The company now expects adjusted earnings of $5.50 per share for 2012, up from the prior guidance of $5.00 per share. AGCO Corp. has also raised its revenue estimates to the range of $10.2-$10.5 billion from the previous guidance of $10 billion. Moreover, the company expects its worldwide industry sales to grow reasonably in 2012 compared to the previous year.

AGCO Corp. is a leading manufacturer and distributor of agricultural equipment and related replacement parts. The company offers a full product line of farm equipment through a wide network of dealers and distributors in more than 140 countries across the world.It competes with companies like CNH Global NV (CNH), Deere & Company (DE) and Kubota Corporation (KUB).

The company completed the acquisition of GSI Holdings in the second half of 2011. GSI Holdings is a leading manufacturer of grain storage and protein production systems and serves its global customer base through more than 500 independent dealers. It produces grain storage and handling solutions for farmers as well as large-scale grain processors. Its protein production product line supports both swine and poultry growers.

Over the years, the diet preference of the emerging markets has shifted towards protein consumption and, therefore, the demand for grain storage as well as swine and poultry production has increased. Thus, there remains ample scope for GSI Holdings to obtain new orders for its products as the markets now prefer more sophisticated technology. Therefore, GSI Holdings has extended AGCO Corp.’s capabilities to the agricultural sector.

The U.S. Department of Agriculture has recently predicted that corn crop in U.S.will be nearly 48 million tons in 2012, up 4.5 million tons year over year, and projected to be the largest crop in the last 75 years. According to its report, worldwide corn production is expected to rise 10% to 946 million tons this year. So, the farmers are now on a buying spree of new tractors and other agriculture equipment. As a result, demand for AGCO Corp.’s agriculture equipment may increase in the coming days.

In addition, AGCO Corp. continues with the expansion of its products line, with particular focus on a high horsepower range of equipment. It has introduced more technologies and localized products like sprayers in Brazil for row crop customers. Besides, it has introduced high technology tractor products like Fendt 700 Vario and Challenger MT 600 which utilize the SCR engine technology. Improved technology guarantees that these new models can run efficiently with less fuel.

Our recommendation on AGCO Corp. is in line with a short-term Zacks #1 Rank (Strong Buy).

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