AGCO Reaps Profit Harvest

10/10/2011


  Recent Price
$32
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
9
  Shares (millions)
99
  Long-Term Debt as % of Capital
13%
  52-Week Price Range
$59.81 - $30.11

AGCO ($32; AGCO) sells agriculture equipment in more than 140 countries, with strong commodity prices and expectations for record farm income keying robust sales of tractors and combines in the first half of 2011.

Agricultural-equipment sales are notoriously cyclical, subject to capricious commodity prices, weather conditions, and economic trends. But prospects for the agricultural sector over the next year look fairly attractive. Impressive operating momentum, a solid balance sheet, and a cheap valuation qualify AGCO as a Buy.

Business breakdown

AGCO produces tractors of various sizes used on farms, orchards, and ranches. Tractors generated 68% of 2010 sales, followed by replacement parts (15%), hay tools and forage equipment (7%), combines (6%), and fertilizer vehicles (4%).

Revenue grew 35% and per-share profits 181% in the first half of 2011. Cash from operations totaled $102 million in the first half, versus $14 million in the same period last year. AGCO credits the improved profitability to stronger prices, a favorable product mix, and higher production volumes in Europe and North America.

North America accounted for 18% of AGCO's sales in the first half of 2011, and South America 22%. The majority of revenue (55%) comes from Europe, Africa, and the Middle East, a region that saw sales jump 55%. Sales in Western Europe benefited from higher commodity prices and improvement in the dairy and livestock sectors. Already a leading player in Western Europe, ACGO is expanding into such emerging markets as Eastern Europe and Russia.

On Oct. 3, AGCO agreed to pay $940 million in cash for GSI Holdings, in a deal to expand beyond farm equipment. GSI, which makes equipment for storing grain and producing protein to feed livestock, is expected to generate $700 million in sales this year — equal to about 8% of AGCO's sales.

Production volumes for tractors and combines should continue to rise — though at a decelerated pace — in coming quarters. Management sees total production advancing about 9% for the year, with Western Europe seeing the strongest growth. Pricing should rise 3% for the year, versus the company's original 2% forecast.

Conclusion

Uncertainty over Europe's financial situation adds some risk to the stock. AGCO shares are down 36% for the year despite strong operating momentum. At just nine times trailing earnings, shares trade 45% below their three-year average. Even if the trailing P/E holds at its depressed level, AGCO needs merely to match the consensus Wall Street estimate for 2012, and the stock would rise 21% by early 2013 The shares trade at seven times 2012 estimated earnings, an 18% discount to their peer group.

With a market capitalization of just $3.19 billion and strong positions in high-growth markets, AGCO could attract takeover interest from rivals Deere (eight times larger) and CNH Global (nearly twice as large). An annual report for AGCO Corp. can be obtained 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
Jun '11
1.35
vs.
0.66
+ 35%
59.81
-
44.56
16 - 15
Mar '11
0.81
vs.
0.10
+ 35%
57.20
-
48.52
25 - 21
Dec '10
0.87
vs.
0.35
+ 19%
51.51
-
36.52
34 - 21
Sep '10
0.65
vs.
0.12
+ 19%
40.73
-
26.24
33 - 21
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2010
6.90
2.29
0.00
51.51
-
25.48
22 - 11
2009
6.63
1.44
0.00
33.83
-
14.62
23 - 10
2008
8.42
4.09
0.00
71.94
-
17.74
18 - 4
2007
6.83
2.55
0.00
71.95
-
28.67
28 - 11
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
95
92
93
81
42
47
24

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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