Hungry For Growth? Feast On AGCO

6/11/2012


  Recent Price
$39
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
8
  Shares (millions)
99
  Long-Term Debt as % of Capital
29%
  52-Week Price Range
$54.00 - $30.11

Demand for farm equipment — particularly in emerging markets — remains strong. AGCO ($39; AGCO), which said May 23 it sees only minimal deterioration in Europe, continues to bank on favorable long-term trends while reaping the benefits of recent expansion moves.

Sales have risen at least 16% and per-share profits at least 30% in each of the last seven quarters — impressive, but unsustainable over the long haul. The consensus projects sales growth of 17% this year and profits up 24%, with about one-third of the growth driven by the November acquisition of GSI, a maker of products for grain storage and livestock production. The 2013 consensus calls for per-share-profit growth of 3%, a target the company should top.

Despite its operating momentum, AGCO looks cheap at seven times the 2012 profit estimate, well below the industry median of nine. AGCO is a Focus List Buy.

Bountiful harvest

Operationally, AGCO offers reasons for optimism. Operating profit margins have expanded in eight consecutive quarters. Despite a rise in capital spending to boost production, AGCO seems confident in its future cash flows. CEO Martin Richenhagen said the company will likely initiate a dividend later this year, targeting an annual payout of about $0.50.

High U.S. farm income has sparked solid tractor sales, and AGCO enjoys pricing power in this country. Even in Europe, AGCO seems well-positioned for the new order. Cuts in farm subsidies could spark consolidation, and larger farms tend to prefer sophisticated tractors, a trend that plays into AGCO's strengths in the region. Last year, AGCO generated 20% of its sales in North America, 21% in South America, and 53% in Europe, Africa, and the Middle East.

Foreign power

Strength in Europe and the U.S. aside, emerging markets should drive much of AGCO's future growth. The United Nations estimates that by 2030, the world will need 50% more food than it does today, and corporations worldwide have pledged $3 billion to improve agricultural efficiency. As part of that initiative, AGCO plans to invest $100 million to create model farms and training centers, helping 25,000 small farmers throughout Africa.

Corporate citizenship doesn't directly boost the bottom line. But in addition to the public and political goodwill that comes with such investments, improvement in the financial viability of farmers should eventually spark higher sales of equipment — with companies already active in the region enjoying a competitive advantage. AGCO says Africa contains 11% of the world's arable land, yet only cultivates 14% of that land.

Attractive valuation

Despite its growth in recent quarters, the market prices AGCO like a company in a drought. At eight times trailing earnings, AGCO trades 52% below its three-year average P/E ratio. The stock also trades at a discount of 21% to its three-year average price/sales and price/operating cash flow ratios. You can obtain an annual report for AGCO Corp. at 4205 River Green Parkway, Duluth, GA 30096, (770) 813-9200, www.agcocorp.com.

AGCO
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Mar '12
1.21
vs.
0.81
+ 26%
54.00
-
43.99
12 - 10
Dec '11
1.44
vs.
0.88
+ 16%
47.57
-
30.11
12 - 8
Sep '11
0.87
vs.
0.66
+ 27%
52.98
-
33.30
14 - 9
Jun '11
1.35
vs.
0.66
+ 35%
59.81
-
44.56
20 - 15
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2011
8.77
4.48
0.00
59.81
-
30.11
13 - 7
2010
6.90
2.32
0.00
51.51
-
25.48
22 - 11
2009
6.63
1.55
0.00
33.83
-
14.62
22 - 9
2008
8.42
3.95
0.00
71.94
-
17.74
18 - 4
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
97
73
96
92
50
89
21

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.
   NM Not Meaningful.


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