Farm Equipment Demand Aid AGCO Corp (AGCO) Despite Higher Costs
AGCO Corporation AGCO is gaining from higher agricultural commodity prices, which are encouraging farmers to invest in farm equipment. Improved industry demand for farm equipment and investment in technology-focused agricultural products will continue to drive growth. However, inflated costs might dent the company’s margin.
Farm Equipment Demand Rides on Higher Prices
Elevated grain prices support healthy firm income, driving demand for agricultural equipment. These are encouraging farmers to upgrade and replace their aging fleets of large equipment, which in turn, will drive AGCO’s top line. These factors will likely drive higher retail industry demand across all three major regions in 2022. Elevated grain equipment demand driven by improved grain prices, farm profitability, population growth and increased protein consumption will continue to strengthen the prospects of the agricultural industry in the near term.
In North America, higher commodity prices and healthy farm prospects are expected to increase sales in the current year. Orders for tractors and combines are significantly higher in North America and Europe. Sales of high horsepower tractors and combines are gaining from extended fleet age and favorable commodity prices, driving higher demand. These factors will drive the North American industry unit tractor sales by 5-10% in the current year from 2021 levels.
European Union (EU) farm economics are expected to remain supportive in 2022, driven by elevated commodity prices and favorable farm economics for dairy producers. Higher commodity prices and favorable exchange rates will continue to drive additional sales growth in South America in 2022 as farmers continue to replace aged equipment. Also, planted acres are expected to expand. Industry demand in South America is expected to improve 5-10% from 2021 levels.
Upbeat Outlook on Strong Farm Prospects
AGCO expects current year sales and earnings growth to benefit from robust end-market demand, positive industry demand trends and strong farm prospects. Net sales for the ongoing year are expected to be between $12.5 billion and $12.7 billion. In 2021, the company reported net sales of $11.14 billion. The upbeat guidance suggests improved sales volumes and positive pricing. Gross and operating margins are anticipated to be higher than 2021 levels, owing to higher sales and production volumes, favorable pricing and improved factory productivity. Management projects EPS for the current between $11.70 and $11.90. The company reported earnings per share of $10.38 in 2021.
Focus on Investments
Apart from favorable market demand, positive market response to the company’s technology-focused products is fueling sales growth and margin expansion across all regions. AGCO continues to invest in products, premium technology and smart farming solutions to improve distribution and enhance digital capabilities to drive margins and strengthen product offerings. These improvements will support the company’s investments in precision agriculture and digital initiatives. It also continues to make investments to upgrade system capabilities, expand product lines and improve factory productivity. AGCO is poised to benefit from the Precision Planting business, growth scopes from a new product pipeline and its retrofit approach. Retrofit allows customers to utilize the latest technology with a lower investment.
However, some factors might impede the company’s growth.
AGCO is encountering significant supply-chain challenges and escalating costs for steel, logistics, transportation and labor. The Russia-Ukraine war dented the company’s operations. Engineering expenses might shoot up 15-20% from 2021 levels, due to higher investments in smart farming and Precision Agriculture products.
Price Performance
AGCO’s shares have gained 16.9% in the past six months compared with the industry’s growth of 6.1%.
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Zacks Rank and Stocks to Consider
AGCO currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the Industrial Products sector are Graphic Packaging Holding Company GPK, Myers Industries MYE and Packaging Corporation of America PKG. While GPK and MYE flaunt a Zacks Rank #1 (Strong Buy), PKG carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Graphic Packaging has an estimated earnings growth rate of 86.8% for the current year. In the past 60 days, the Zacks Consensus Estimate for current-year earnings has been revised upward by 7.6%.
Graphic Packaging pulled off a trailing four-quarter earnings surprise of 7.2%, on average. The company’s shares have appreciated 14.8% in a year.
Myers Industries has an expected earnings growth rate of 67% for 2022. The Zacks Consensus Estimate for the current year’s earnings has moved up 27% in the past 60 days.
MYE has a trailing four-quarter earnings surprise of 20.1%, on average. Myers Industries’ shares have gained 13% in the past year.
Packaging Corporation has an expected earnings growth rate of 16.2% for 2022. The Zacks Consensus Estimate for the current year’s earnings rose 4.2% in the past 60 days.
PKG has a trailing four-quarter earnings surprise of 19.6%, on average. Packaging Corporation’s shares have gained 4% in the past year.
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