Increasing demand for agricultural equipment from growing food demand and the improved financial condition of farmers drove earnings and the shares of AGCO up since 2009. However, demand for ag equipment in 2014 is expected to decline slightly and current forecasts are for softness to continue into 2015. But, this is priced into the shares of AGCO and other ag stocks such as Deere (NYSE: DE) and CNH (NYSE: CNHI). Long-term tends remain positive with steadily rising food demand and an ongoing need for developing markets to invest in equipment. The more cyclical US market will rebound and the shares of AGCO are a potential value idea for the long-term investor.
AGCO, Your Agriculture Company, (NYSE: AGCO) is a global manufacturer and distributor of agricultural equipment such as tractors and combines. It offers a full line of tractors, combines, hay tools, sprayers, forage equipment, tillage, implements, grain storage and protein production systems as well as replacement parts. It has five primary brands it markets under, Challenger, Fendt, GSI, Massey Ferguson and Valtra. The company sells through 3,150 dealers located in 140 countries. The company is headquarters in Duluth, GA but Europe contributes the most to annual sales, see the following sales breakdown for FY13E.
As a brand, AGCO is viewed as producing a good products but it is still considered a second tier brand behind the market leader Deere (NYSE: DE) as well as CNH Industrial (NYSE: CNHI).
The Board of AGCO approved a $500 million share repurchase program in December 2013 with the expectation to complete it by June 2015. This is one way it is returning cash to shareholders along with dividend growth. Every $100 million in shares repurchases adds around $0.10 per share.
Positive Global Fundamentals
AGCO has grown sales by 3.1x and EPS by 4.8x since 2003 behind strong industry fundamentals and internal improvements. A growing global population is largely responsible for greater food demand but alternative fuels like ethanol also play role in increasing demand.
Food demand for animals, grains, soybeans, corn and other crops increases the total annual demand for agricultural products. This year-over-year increase in demand is fulfilled by planting more acres but also by improving the amount each acre produces (crop yields). Modern ag equipment like AGCO produces helps improve crop yields. In particular, most of the population growth is occurring in the developing world, where yields lag the US. The need for these economies to improve yields should continue to drive demand for AGCO along with Deere and CNH.
Greater demand for food, especially protein, increased crop prices significantly. This has resulted in higher income for the farms and a dramatic improvement in financial condition from levels seen in the 80s. The improving economics of farms which allows them to invest and increases demand for agricultural equipment.
The USDA and a similar organization in Brazil issue update reports that drive the performance of the Ag stocks. If the farmer will have more money because of high prices and good yields, the stocks do well, the reverse is also true. Currently, crop prices have declines leading to a soft US Ag equipment market for 2014. There is also some annual volatility based on weather. However, an investor looking at the sector longer term, should look through these and see sell offs as buying opportunities.
Growth Opportunities for AGCO
While Brazil is the 10th largest economy, 20% of its GDP is related the Ag. It is the world’s second largest soybean producer, the US is first, and has a large sugarcane industry for food and for ethanol feedstock. Tractor sales have grown to 83,000 annually from 34,000 in 2003. This market will continue to expand as it seeks to improve yields and plants more acres.
Russia also represents a large opportunity. It has under-invested in farm equipment for decades and has yields and undeveloped farm land as a result. For example, the US has 25 tractors per 1,000 hectares, Russia 3 tractors over the same area. Africa and other developing regions are also all opportunities for AGCO.
AGCO historically was not a technology leader which has led to its place behind DE and CNH. However, it will launch 16 new harvesting products in 2014 and 24 from 2015-2017 compared to just 4 in 2013. In tractors, it has 41 new or upgraded products versus 15 in 2013 and has plans for 47 more. R&D has increased by over 5x to $360 million in 2013 from ten years prior.
It is also investing in grain storage products to reduce loss after a harvest which is particularly a problem outside North America, Europe and Russia. Protein productivity is also in focus with the US facilities still 50% more productive than those in Brazil and China.
Investor should dive further into AGCO as a potential buy because the industry is out of favor. Long-term fundamental remain intact and the Street has priced this information into the shares. Baring a sharp decline in global equipment demand, credit crisis or macroeconomic event, there is not much downside to current forecasts. AGCO may be a long-term value idea in a market where it is hard to find value stocks.
What are your thoughts on AGCO and the agricultural sector?
John has seven years of experience as an equity analyst following various stocks and sectors. As a senior equity analyst, he received awards from the Wall Street Journal and Financial Times for his writing.