On Nov 21, we issued an updated research report on AGCO Corporation AGCO. The company’s performance will be driven by focus on strategic investments, acquisitions and capital-allocation plan. However, its results may be affected by low commodity prices, rising steel prices and elevated expenses.
Let’s illustrate these factors in detail.
Strategic Investments Support AGCO
AGCO continues to make strategic investments to refresh and expand its product lines, upgrade system capabilities and improve factory productivity. The company expects capital expenditures to be around $250 million in 2018 which will be used primarily to support the development and enhancement of new and existing products, upgrade system capabilities and improve factory productivity. Its spending plan for the current year will support long-term business growth.
Acquisitions to Spur Growth
AGCO completed two acquisitions in the past year. In September 2017, it acquired Precision Planting — a leader in innovative planting technology. AGCO’s purchase of Lely Group’s forage division has significantly enhancedits hay and forage product line in Europe. Acquisitions accounted for approximately 3% of the net sales increase in third-quarter 2018 and will likely boost 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.
Low Commodity Prices Remain a Concern
Farm income remains under pressure due to lower commodity prices. In the United States, the USDA estimates that farm income will be down 13% to $65.7 billion in 2018. This remains a concern for AGCO.
Elevated Expenses to Hurt 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 in 2018 compared with 2017.These factors will dent earnings.
Share Price Performance
Over the past year, AGCO has underperformed the industry with respect to price performance. The stock has depreciated around 18%, while the industry has recorded loss of 8% during the same time frame.
Zacks Rank & Key Picks
AGCO carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the same sector include Enersys ENS, Flowserve Corporation FLS and Mobile Mini, Inc. MINI. While Enersys flaunts a Zacks Rank #1 (Strong Buy), Flowserve and Mobile Mini carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Enersys has a long-term earnings growth rate of 10%. The company’s shares have gained 23% over the past year.
Flowserve has a long-term earnings growth rate of 17.3%. The stock has climbed 17% in a year’s time.
Mobile Mini has a long-term earnings growth rate of 14%. Its shares have rallied 12% in the past year.
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