On Dec 26, we issued an updated research report on AGCO Corporation (AGCO). The manufacturer of agricultural equipment is poised to benefit from strategic investments in new product development, distribution enhancement and productivity improvement. However, anticipated decline across all major global agricultural markets, FINAME funding interruptions and volatile foreign currency will hurt growth.
AGCO remains committed to its strategic plans to drive growth and profitability. The company has made significant investments in engineering and applied research to improve the quality and performance of products, develop new products and comply with government safety and engine emissions regulations. The company expects capital expenditures for 2014 in the range of $350???$375 million, primarily to meet new engine emission requirements, support the development and enhancement of new and existing products and complete the assembly factory in China.
AGCO expects GSI sales to be up approximately 10% for 2014 compared with 2013, with most of the growth occurring outside the U.S. The countercyclical nature of the protein production sector supports more stable earnings in GSI. Over the long term, rise in population worldwide and change in diet are expected to increase the demand for more grain storage and protein production capacity.
Further, AGCO and Appareo Systems agreed to enter into a joint venture (JV) on Nov 5 to develop technology for advanced machine control systems, innovative electromechanical devices and other systems. The proposed JV will build on the momentum of Fuse Technologies, Appareo will contribute to the initiative through R&D, intellectual property generation and advanced technology concept development.
The company is also committed to its plans of expanding in the Commonwealth of Independent States (CIS), China and Africa, where it sees considerable growth potential. In September, AGCO entered into a 50-50 JV with Russian Machines to manufacture and distribute agricultural equipment and replacement parts in Russia. Further, it plans to invest in production facilities in China over the next 15 years. In addition, AGCO intends to grow its presence in Africa and plans to invest $100 million over the coming years.
On Dec 15, AGCO sanctioned a new share repurchase program worth up to $500 million in addition to its prior repurchase authorization, effective through Dec 31, 2016. The new program reflects AGCO’s healthy cash flow generation and long-term strength. It is also in sync with the company’s commitment to increase shareholder value through continuous investment in business.
However, AGCO believes that the global industry demand will continue to soften in 2014 in comparison to 2013. The company anticipates declines across all major global agricultural markets, particularly in the row crop segment. AGCO projects 2014 earnings in the range of $4.10 to $4.30 a share on the back of net sales in the $9.5 to $9.7 billion range. The company also remains concerned that lower sales and production volumes will affect gross margins.
In addition, AGCO reduced the forecast for higher-horsepower tractors, combines and sprayers to reflect softening demand within the row crop farming sectors. The company also expects demand declines in the arable farming sector and more significant drops in the demand for higher-horsepower equipment in Western Europe.
AGCO expects production volumes for tractors to be down 15% to 20% in the fourth quarter and about 15% in 2014 from the prior-year period. AGCO???s South America industry forecast reflects pressure from FINAME funding interruptions earlier in the year, a weaker sugar sector and lower demand in Argentina. Additionally, after several years of strong industry sales in Germany and France, the company is demand in 2014 to decline from 2013.
Both the euro and Brazilian real weakened during third-quarter 2014 and currency translation affected net sales by about 0.7%. Currency is expected to reduce AGCO???s fourth-quarter sales more significantly, resulting in an annual negative impact of about 2% in 2014. Moreover, volatile foreign currency remains a concern for AGCO.
Furthermore, the estimates for AGCO moved downward over the past 90 days. The Zacks Consensus Estimate for 2014 decreased more than 14.4% to $4.17 per share and for 2015 the same reduced 35% to $3.01.
AGCO carries a Zacks Rank #3 (Hold).
Stocks to Consider
Some better-ranked machinery makers worth consideration include Alamo Group, Inc. (ALG), Lindsay Corporation (LNN) and Allegion plc Ordinary Shares (ALLE). All these stock sport a Zacks Rank #1 (Strong Buy).
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