In spite of several industry headwinds, AGCO (AGCO) managed to deliver a solid ‘beat and raise’ on July 28. This led to a flurry of positive earnings estimate revisions, which sent the stock to a Zacks Rank of 1 (Strong Buy).
AGCO, which makes agricultural equipment like tractors and combines, is facing significant challenges from falling commodity prices and lower farm incomes, in addition to a strong dollar. But the company has managed well in a difficult operating environment, cutting costs and “controlling what it can”.
Second Quarter Results
AGCO delivered a solid ‘beat and raise’ on Tuesday, July 28. Earnings per share for the second quarter came in at $1.25, crushing the Zacks Consensus Estimate of $1.02.
Net sales fell 25% year-over-year to $2.069 billion versus the consensus of $2.077 billion. Sales were down 25% year-over-year. However, unfavorable currency translation accounted for 14 percentage points of the decline. Excluding forex, net sales declined 11%.
Sales were down at a double-digit clip in every geographical region, including its largest market – Europe/Africa/Middle East – which saw sales drop 25% (17 percentage points of which was due to forex). Sales of both tractors and combines were lower year-over-year.
Nonetheless, solid cost management and lower material costs drove better-than-expected margins in the quarter.
Estimates Rising
Despite the difficult operating environment, management actually increased its full year EPS guidance. The company now expects 2015 EPS of “approximately” $3.10, up from “approximately” $3.00. Net sales guidance remained the same at $7.7-$7.9 billion.
This prompted analysts to revise their EPS estimates higher, sending the stock to a Zacks Rank #1 (Strong Buy). The 2015 Zacks Consensus Estimate is now $3.10, in-line with guidance and up from $2.93 before the report. The 2016 consensus has climbed from $2.99 to $3.08 over the same period.
Analysts noted AGCO’s strong performance in the face of a very difficult operating environment. Management is “controlling what they can”, as one analyst put it.
Reasonable Valuation
In addition to a Zacks Rank of 1 (Strong Buy), AGCO also sports a Zacks Value Style Score of ‘B’. Shares trade around 18x 12-month forward earnings, which is in-line with the industry median. Its enterprise value to cash flow ratio of 10 is a significant discount to the industry median of 15.
The Bottom Line
With rising earnings estimates in the face of a difficult environment and reasonable valuation, shares of AGCO could continue to rally.
Todd Bunton, CFA is a Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor and Surprise Trader services.
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