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AGCO Corp Rides on Investments & Farm Income Amid Weak Demand

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·5 min read
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  • AGCO
  • BWEN
  • SLGN
  • WATT

On May 29, we issued an updated research report on AGCO Corporation AGCO. Higher expected U.S farm income bodes well for agricultural equipment demand for the ongoing year. Cost-control actions, strategic investment in products, technology, and acquisitions will also drive growth. However, weak demand and production suspension on account of the coronavirus outbreak remain concerns.

Agricultural Sector Looking Up

The U.S. farm sector seems to be showing early signs of stabilization following the passage of the United States Mexico Canada Agreement (USMCA) and the Phase 1 trade agreement with China. Per the U.S. Department of Agriculture's (USDA) latest available projections, net farm income is anticipated to improve 3.3% year over year to $96.7 billion in 2020. This will make farmers resume spending on agricultural equipment, which will boost the company’s top line. Further, the recently-announced $16-billion COVID-19 Aid Package by the USDA for U.S. farmers and livestock producers is likely to marginally offset the unfavorable impact of lower commodity prices.

Investment & Acquisitions to Boost Growth

AGCO continues to invest in products and technology to improve distribution and enhance digital capabilities, in order to boost margins and strengthen product offerings. The company has been making investments to enhance and expand its product lines, upgrade system capabilities, as well as improve factory productivity. The company has completed two acquisitions in the past few years. It acquired Precision Planting, which is a leading manufacturer of high-tech planting equipment. The acquisition helped expand the company’s precision farming technology offerings on a global basis. Moreover, AGCO purchased the forage division of the Lely Group, which significantly enhanced its hay and forage product line in Europe, fueling growth in this market.

Moreover, the company is implementing cost-cutting actions and has suspended further share repurchases in order to preserve liquidity in the current turbulent situation, while expecting to maintain the payment of its quarterly dividend.

Factory Shut Downs & Sluggish Demand

AGCO has withdrawn its financial guidance for the current year given the uncertainties related to the industry demand and production constraints on account of the coronavirus outbreak. Production has been significantly reduced or suspended in most of the company's Asian, European and South America facilities, primarily due to material shortages in the supply chains. Consequently, the factory shutdown is likely to significantly hurt second-quarter sales and earnings performance, while adverse impact of the pandemic will suppress demand this year.

Bleak Market Outlook

Dry weather across most of Western Europe is thwarting the development of the winter wheat crop, limiting production estimates. Further, European dairy is witnessing lower milk prices as the coronavirus pandemic has been hurting demand. In South America, farmers are exhibiting a cautious approach to equipment purchases due to the current dismal economic and political environment.

In North America, farmers have been slowing investments due to a bleak profitability outlook stemming from low crop prices and a significant decline in ethanol demand. The protein-production segment is expected to be adversely impacted by the pandemic, particularly in North America, with nearly half of pork-processing capacity in the United States currently on suspension.

The U.S farm sector in the ongoing year will remain challenged due to weak demand and lower commodity prices. This is likely to dampen AGCO’s revenues. Further, the coronavirus outbreak has marred agricultural exports to China. Hence, it remains to be seen whether or not China will be able to honor its terms of the Phase 1 trade agreement. This will remain an overhang on the company.

Price Performance

AGCO’s shares have declined 17.7% over the past year, as against the industry’s growth of 2.6%.

Zacks Rank & Stocks to Consider

AGCO currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Industrial Products sector are Silgan Holdings Inc. SLGN, Broadwind Energy, Inc. BWEN and Energous Corporation WATT. While Silgan sports a Zacks Rank #1 (Strong Buy), Broadwind Energy and Energous carry a Zacks Rank of 2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Silgan has a projected earnings growth rate of 11.3% for 2020. The company’s shares have gained 15% in the past three months.

Broadwind Energy has an expected earnings growth rate of 174% for the current year. The stock has appreciated 6% over the past three months.

Energous has an estimated earnings growth rate of 17.3% for the ongoing year. The company’s shares have rallied 37% in three months’ time.

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