jeff9366
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Khurram Rao
Long/short equity, medium-term horizon, research analyst, industrials
AGCO Corporation - A Good Pick For Long-Term Investment
Nov. 19, 2015 3:27 AM ET | About: AGCO Corporation (AGCO)
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More?
Summary
Due to the weakness in the global agricultural industry and hence commodity prices, AGCO Corporation revenues are in persistent decline.
In the meantime, the company continues with its acquisition agenda, which is somehow helping its margins not to fall further.
Based on its fundamentals, the stock remains undervalued but only in a long-run perspective.
Background
Established in 1990 as a result of employee buyout, Allis-Gleaner Corporation (NYSE:AGCO) is an agricultural equipment manufacturer. AGCO offers a line of tractors, which comprise around 60% of the business, along with combines (6%), application equipment (5%), hay tools and forage equipment (9%), grain storage and protein production units (7%) and replacement parts (12%). Over the years, AGCO has built a portfolio of agricultural equipment that it manufactures and distributes. This has been largely achieved through acquisitions of notable brands in the markets it operates. The same strategy has been applied for expansion in new markets i.e., through acquisition of local companies - for instance, Massey Ferguson in 1993, Fendt from Fendt, Germany, in 1997, Challenger from Caterpillar Inc. (NYSE:CAT) in 2002, Valtra from Kone Group, Finland, in 2004. The list continues as AGCO continues to build upon this portfolio expanding its product offering. It has used the capabilities acquired in the course of its expansion to create synergies between different manufacturers resulting in an enhanced product line and re-branding efforts that drove sales further.
Financial Analysis
The industry conditions have been soft over the past two years after experiencing high growth rates during CY10-13, when the markets initiated recovery. The high expenditures during the prior periods resulted in softer demand over CY14 to date as the high production levels put pressure on prices, thereby dampening further equipment expenditures. Capital expenditure on equipment in the U.S. jumped 14.1% during CY11, where AGCO's sales posted 27% growth and growth rates saw a gradual decline thereafter. Combined forestry, fishing, agricultural services and durable goods manufacturers capital expenditure jumped 10% during CY11, easing off a percent to 9% in two periods thereafter, CY12-13 and total sales of AGCO over CY10-13 jumped by 56% strengthening the bottom line.
However, as the weakness in growth continued, revenues decreased by 10% in CY14 and almost 20% in the 9MCY15 compared to corresponding period last year. The decline in capital expenditures and thereby revenues of AGCO is also supported by decreasing prices as indicated by the IMF Commodity Price index which decreased 29% at CY14 close and 21% further decline at October 2015, 14% of which is on account of agricultural prices where broad-based weakness has been observed. Almost all major commodity prices have experienced a dip due to high production levels and overall weaker demand in major markets. While oversupply and weak price conditions prevail in major markets of the company, sales have shifted to relatively low priced products i.e. from high horse-power tractors, combines and sprayers to smaller tractors and this trend has been observed across its four operating segments defined as geographical regions, namely, North America, South America, Europe/Africa/Middle East and Asia/Pacific. Support to low-priced equipment sales has been provided by slight price increments, but it was not able to offset the impact of a stronger dollar, which was -2.4% in CY14 and -13.5% in the 9MCY15, where major deterioration has been realized on account of Europe/Africa/Middle East segment.
Restructuring measures implemented by the company comprised reduction of workforce, whereby an aggregate 1,950 employees have been let go over CY14 and 9MCY15, resulting in a relatively flat gross margin. But the weakness in sales carried forward to operating costs ending in a 1% reduction in operating margin over CY14, a further 2% decline when comparing 9MCY15 to CY14 and almost the same percent decline when comparing to the corresponding period last year. Finance costs depict a slight increase over 9MCY15 compared to CY14 and corresponding period last year but the same is compensated by slightly higher earnings from affiliates and slightly lower taxes, resulting in 4% net margin which is unchanged from CY14 close and almost a percent lower from 9MCY14. While margin is under pressure on the back of lower revenues from changing sales mix, it is higher than the five-year low, mainly due to the expansion in the business through acquisitions. There were two acquisitions in CY14, one each in North and South America, and AGCO has acquired a German poultry related equipment manufacturer in the 9MCY15, expanding upon its existing product portfolio and diversifying the sales mix within the agriculture equipment arena.
The company's internally generated cash flow sufficiently covers its investing requirements, but it falls short for the company's financing requirement which includes dividends, share repurchases and retirement of existing debt. The company has maintained on average 13% long-term debt, which is used for working capital and investment hedge and includes debt denominated in foreign currency. AGCO also engages in derivatives, which include foreign currency contracts and interest rate swaps for hedging associated risks and also benefiting from favorable market movements. Overall cash flow declined during CY14 on the back of lower operating inflows, capital expenditures related to plant, property and equipment (PP&E) and acquisitions and share repurchases. There was a slight gain in net cash flow in 9MCY15 due to debt proceeds of USD462.3M, which have been incurred for research and development projects, working capital loans and restructuring of debt to form an investment hedge against the Euro weakness.
(Table will not copy.)
Valuation
Current weakness in the market has set a negative tone for CY15 close and CY16. Revenues are expected to be under pressure and dip by 23% in CY15 based on the first nine months and continue flat into CY16 along with depressed margins. However, AGCO remains a major player with a strong base in the agricultural equipment market and will adjust through changes in the sales mix and hedging its currency risks resulting in better results thereafter. There will be modest growth from the developed regions, namely, North America and Europe, which are currently under pressure on the back of an oversupply situation and the fact that new capital expenditure has been incurred in these regions in the three years prior to CY14. Significant contribution is expected from Brazil and China, where aggressive expansion policies will boost agricultural economy and AGCO's existing presence there will allow it to capitalize on this situation. Moving forward AGCO is also expected to concentrate its acquisition drive in these regions in a bid to establish its position as a major player and build upon its product portfolio, which will further drive revenues and margins. AGCO is already established in South America, chiefly Brazil, but maintains a major chunk of its assets in the U.S. and Europe, therefore further investment may be expected in this region along with Asian markets, mainly China. This diversification is expected to drive revenues in the future as developed markets capital expenditure cycle completes and demand for new machinery rises afresh. Therefore, while AGCO remains a strong, dividend-paying investment in the long-run, its short-run prospects are not too bright given the overall market conditions bringing the stock price under pressure. Our target for November end is just below the current price at USD45.39.
(Table will not copy.)
Conclusion
The current price at USD46.75 is rising ex-dividend, but still has not covered previous two weeks' losses before the dividend payment, finding support around USD44 and relisting climbing to USD47. Monthly trend is downward and so is the five-year annual trend from the peaks of around USD65 in CY13 to an average of USD49 observed to date CY15. Although there is short-term weakness, it is a dividend-paying stock with good prospects for long-term growth on the back of its market presence and overall growth strategy.
DIRECT LINK TO ARTICLE: AGCO Corporation - A Good Pick For Long-Term Investment - AGCO Corporation (NYSE:AGCO) | Seeking Alpha
Long/short equity, medium-term horizon, research analyst, industrials
AGCO Corporation - A Good Pick For Long-Term Investment
Nov. 19, 2015 3:27 AM ET | About: AGCO Corporation (AGCO)
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More?
Summary
Due to the weakness in the global agricultural industry and hence commodity prices, AGCO Corporation revenues are in persistent decline.
In the meantime, the company continues with its acquisition agenda, which is somehow helping its margins not to fall further.
Based on its fundamentals, the stock remains undervalued but only in a long-run perspective.
Background
Established in 1990 as a result of employee buyout, Allis-Gleaner Corporation (NYSE:AGCO) is an agricultural equipment manufacturer. AGCO offers a line of tractors, which comprise around 60% of the business, along with combines (6%), application equipment (5%), hay tools and forage equipment (9%), grain storage and protein production units (7%) and replacement parts (12%). Over the years, AGCO has built a portfolio of agricultural equipment that it manufactures and distributes. This has been largely achieved through acquisitions of notable brands in the markets it operates. The same strategy has been applied for expansion in new markets i.e., through acquisition of local companies - for instance, Massey Ferguson in 1993, Fendt from Fendt, Germany, in 1997, Challenger from Caterpillar Inc. (NYSE:CAT) in 2002, Valtra from Kone Group, Finland, in 2004. The list continues as AGCO continues to build upon this portfolio expanding its product offering. It has used the capabilities acquired in the course of its expansion to create synergies between different manufacturers resulting in an enhanced product line and re-branding efforts that drove sales further.
Financial Analysis
The industry conditions have been soft over the past two years after experiencing high growth rates during CY10-13, when the markets initiated recovery. The high expenditures during the prior periods resulted in softer demand over CY14 to date as the high production levels put pressure on prices, thereby dampening further equipment expenditures. Capital expenditure on equipment in the U.S. jumped 14.1% during CY11, where AGCO's sales posted 27% growth and growth rates saw a gradual decline thereafter. Combined forestry, fishing, agricultural services and durable goods manufacturers capital expenditure jumped 10% during CY11, easing off a percent to 9% in two periods thereafter, CY12-13 and total sales of AGCO over CY10-13 jumped by 56% strengthening the bottom line.
However, as the weakness in growth continued, revenues decreased by 10% in CY14 and almost 20% in the 9MCY15 compared to corresponding period last year. The decline in capital expenditures and thereby revenues of AGCO is also supported by decreasing prices as indicated by the IMF Commodity Price index which decreased 29% at CY14 close and 21% further decline at October 2015, 14% of which is on account of agricultural prices where broad-based weakness has been observed. Almost all major commodity prices have experienced a dip due to high production levels and overall weaker demand in major markets. While oversupply and weak price conditions prevail in major markets of the company, sales have shifted to relatively low priced products i.e. from high horse-power tractors, combines and sprayers to smaller tractors and this trend has been observed across its four operating segments defined as geographical regions, namely, North America, South America, Europe/Africa/Middle East and Asia/Pacific. Support to low-priced equipment sales has been provided by slight price increments, but it was not able to offset the impact of a stronger dollar, which was -2.4% in CY14 and -13.5% in the 9MCY15, where major deterioration has been realized on account of Europe/Africa/Middle East segment.
Restructuring measures implemented by the company comprised reduction of workforce, whereby an aggregate 1,950 employees have been let go over CY14 and 9MCY15, resulting in a relatively flat gross margin. But the weakness in sales carried forward to operating costs ending in a 1% reduction in operating margin over CY14, a further 2% decline when comparing 9MCY15 to CY14 and almost the same percent decline when comparing to the corresponding period last year. Finance costs depict a slight increase over 9MCY15 compared to CY14 and corresponding period last year but the same is compensated by slightly higher earnings from affiliates and slightly lower taxes, resulting in 4% net margin which is unchanged from CY14 close and almost a percent lower from 9MCY14. While margin is under pressure on the back of lower revenues from changing sales mix, it is higher than the five-year low, mainly due to the expansion in the business through acquisitions. There were two acquisitions in CY14, one each in North and South America, and AGCO has acquired a German poultry related equipment manufacturer in the 9MCY15, expanding upon its existing product portfolio and diversifying the sales mix within the agriculture equipment arena.
The company's internally generated cash flow sufficiently covers its investing requirements, but it falls short for the company's financing requirement which includes dividends, share repurchases and retirement of existing debt. The company has maintained on average 13% long-term debt, which is used for working capital and investment hedge and includes debt denominated in foreign currency. AGCO also engages in derivatives, which include foreign currency contracts and interest rate swaps for hedging associated risks and also benefiting from favorable market movements. Overall cash flow declined during CY14 on the back of lower operating inflows, capital expenditures related to plant, property and equipment (PP&E) and acquisitions and share repurchases. There was a slight gain in net cash flow in 9MCY15 due to debt proceeds of USD462.3M, which have been incurred for research and development projects, working capital loans and restructuring of debt to form an investment hedge against the Euro weakness.
(Table will not copy.)
Valuation
Current weakness in the market has set a negative tone for CY15 close and CY16. Revenues are expected to be under pressure and dip by 23% in CY15 based on the first nine months and continue flat into CY16 along with depressed margins. However, AGCO remains a major player with a strong base in the agricultural equipment market and will adjust through changes in the sales mix and hedging its currency risks resulting in better results thereafter. There will be modest growth from the developed regions, namely, North America and Europe, which are currently under pressure on the back of an oversupply situation and the fact that new capital expenditure has been incurred in these regions in the three years prior to CY14. Significant contribution is expected from Brazil and China, where aggressive expansion policies will boost agricultural economy and AGCO's existing presence there will allow it to capitalize on this situation. Moving forward AGCO is also expected to concentrate its acquisition drive in these regions in a bid to establish its position as a major player and build upon its product portfolio, which will further drive revenues and margins. AGCO is already established in South America, chiefly Brazil, but maintains a major chunk of its assets in the U.S. and Europe, therefore further investment may be expected in this region along with Asian markets, mainly China. This diversification is expected to drive revenues in the future as developed markets capital expenditure cycle completes and demand for new machinery rises afresh. Therefore, while AGCO remains a strong, dividend-paying investment in the long-run, its short-run prospects are not too bright given the overall market conditions bringing the stock price under pressure. Our target for November end is just below the current price at USD45.39.
(Table will not copy.)
Conclusion
The current price at USD46.75 is rising ex-dividend, but still has not covered previous two weeks' losses before the dividend payment, finding support around USD44 and relisting climbing to USD47. Monthly trend is downward and so is the five-year annual trend from the peaks of around USD65 in CY13 to an average of USD49 observed to date CY15. Although there is short-term weakness, it is a dividend-paying stock with good prospects for long-term growth on the back of its market presence and overall growth strategy.
DIRECT LINK TO ARTICLE: AGCO Corporation - A Good Pick For Long-Term Investment - AGCO Corporation (NYSE:AGCO) | Seeking Alpha
