Introduction and Overview – Analysis of AGCO:
Your Agriculture Company (NYSE:AGCO) is the world’s largest farm equipment manufacturer, selling tractors, combines, and all kinds of other farm equipment to customer all around the world. When this AGCO analysis was written AGCO had a market capitalization of $5.1B and shares are trading around $55.
So let me tell you what the AGCO investment case is all about…
AGCO has roots going back to the 1800′s. But it’s current form was founded in 1990 by the purchase of Deutz Allis Corporation from Kloeckner-Humboldt-Deutz AG. Since then AGCO has continued to expand through organic market growth and strategic acquisitions.
The AGCO business model is pretty easy to understand. I need to dig deeper into the specific sales channels and how the company retains customers. But despite competition from the likes of John Deere and CNHI, it seems that making and distributing farm equipment through a network of dealers is relatively straightforward.
On that note, let’s take a closer look at the market AGCO operates in, and the products it sells.
AGCO Competitive and Market Analysis:
At first glance the farm equipment business might not be that exciting. But at the end of the day, everyone needs food. So learning where it comes from, and what’s changing in the farming industry is important to understanding the competitive advantage of AGCO.
So as an investor…
You’ll be pleased to know AGCO appear to be at the leading edge of farm productivity. They are innovators with their precision farming platform. And while you might not think growing and harvesting crops is high tech business, agricultural output gains in productivity enabled by technology are impressive. From a recent interview with AGCO (emphasis mine):
“Frankly, we have a lot of customers who are looking for efficiency tools, and one of the advantage of new equipment is the efficiencies we build into these machines be it a baler or a tractor. You can talk about fuel economy, the ability to get more work done, the ability to make a bigger or more dense bale of hay; all of those things contribute to the farmers ability to make money, and they’ll prove their worth in a market like we have in 2014.”
See for yourself, from this AGCO analyst day presentation,
AGCO sees a lot of opportunity in emerging and developing markets based on their ability to improve farming efficiency.
From the slide above you can see AGCO sees a lot of opportunity to have an impact and improve quality of life in emerging markets. AGCO is also investing aggressively in R&D to keep finding new solutions and innovative product offerings.
AGCO continues to grow their investments in R&D – driving their strong pipeline of new products.
In addition to actively exploiting the future of farming, AGCO management has built (and acquired) some leading brands over the years. You can read the full AGCO history here. Fendt, Massey and Valtra are all respected brands in their respective markets.
AGCO has developed and acquired a competitive offering of brands.
So as you can see, AGCO is pretty well-positioned in the farm equipment business. And global population growth continues to drive demand for their products. Now that you have an overview of AGCO and the market they operate in, let’s start analyzing the performance of AGCO shares over the last couple years.
Price Performance Analysis of AGCO Stock:
Shares of AGCO have had lumpy price performance over the last couple of years. Just take a look at the weekly chart below.
AGCO Long term technical analysis shows lumpy price performance over the last couple of years. Keep reading to learn what this means to investors.
You should be able to see for yourself that shareholders of AGCO have been jerked around a little bit. The good news is, while AGCO stock has been slow to recapture prior highs, it isn’t overvalued either. And even based on conservative intrinsic value calculations I think AGCO has significant upside from here.
So although it’s not entirely smooth sailing from a technical analysis perspective, AGCO should be able to keep pressing higher. Just don’t expect any sudden explosions in price (upside earnings surprises not withstanding). Speaking of earnings, let’s look at the current valuation of AGCO.
If you’re a value investor like me, I think you’ll like what you find…
AGCO Fundamental Analysis – Financial Valuation
AGCO initially caught my eye because the stock appeared to be pretty well valued. At a glance, AGCO is appealing because it’s trading only about 25% above book value. And with a P/E hovering around 9 it’s hard to argue this stock is expensive relative to earnings.
The PEG ratio also comes in below 1, (0.94 to be precise), which is consistent with managements 2014 guidance of $6 EPS - showing future earnings aren’t being valued at a premium by the market. And I’m not the only one who thinks AGCO’s low expectations may make it a buy.
But wait. It gets better…
You see while these fundamental metrics are interesting, the long term performance of AGCO is even more impressive. Here are the key stats from Morningstar:
AGCO has consistently grown revenue, earnings, free cash flow and book value. To a long term investor this looks like a pretty good track record. (Click to enlarge)
The fundamental picture for AGCO looks pretty good. Top and bottom line growth have improved quite a bit. This boring old farm equipment company has a cap rate of almost 15%, which in this inflated stock market is a rare find. And operating margins have slowly improved due to factory efficiency upgrades.
AGCO is also throwing off large free cash flows. These revenue streams appear to be sustainable. And when FCF is discounted back to present value, future cash reflect an intrinsic value closer to $70 per share, even when using conservative growth rates.
I love finding investment opportunities that show a margin of safety even with conservative assumptions. I think AGCO is starting to fit the bill. But…
Even though AGCO might already be an interesting investment opportunity, let’s take a more in-depth look at the growth potential anyways.
AGCO 2014 Growth Narrative and Analysis:
AGCO has consistently grown over the years, so mid-single digit growth seems like a reasonable expectation going forward. Management has consistently said AGCO will continue to expand with an emphasis on slow profitable growth, rather than buying market share. As capital-conscious investors that’s what we like to see.
So where does the earnings growth come from? Interestingly enough AGCO has a nice global footprint driving revenue, as seen in their recent 4Q13 earnings results…
This large global exposure is nice to see in a farm equipment supplier because it provides some diversification against being exposed to nature’s whims in any one part of the globe. With operations on a number of different continents AGCO has some insulation from the hardship of farmers in one locality.
In the coming years, AGCO management is positioned to take advantage of market opportunities in Brazil, Russia and Africa.
That said, earnings for 2014 are expected to be flat compared to the year prior so there may be better opportunities to buy AGCO if there is a sustained stock market correction.
While management is doing a good job tempering shareholder expectations for growth this year, they’re trying to unlock value in other ways. Keep reading to see what I mean.
Analysis: Is AGCO Management Shareholder Friendly?
The AGCO management team seems to be increasingly focused on unlocking shareholder value. Not only are they advocating for profitable growth, but they’re also increasing dividends and authorizing a $500M share buy back. There’s a nice discussion of the merits in this AGCO Seeking Alpha article.
As an investor, it’s nice to see management actively trying to return cash to shareholders. While the dividend yield is still under 1%, there is lots of room for growth given the 7-8% payout ratio.
You might say this is just the beginning. And even more interesting to me…
A $500M share buyback is equivalent to 10% of the float of AGCO shares. This pretty clearly indicates that management thinks the stock is undervalued (as do I). By reducing the outstanding shares they can use their large free cash flows to further boost EPS. Interestingly enough, AGCO insiders are also buying shares at a frenetic pace.
With a management team focused on profitable growth, returning capital to shareholders and macroeconomic tailwinds it seems like the AGCO share price might continue to climb up. Of course, an investment in AGCO isn’t without risk.
Analyzing the Risks of Investing in AGCO:
It’s always hard to analyze the risks of an investment. And AGCO is no different. One risk to keep in mind is the opportunity cost of AGCO. After all…
Farming: Slow and steady wins the race.
The farm equipment market is a little bit boring. This is not a photo sharing app that Facebook will buy out tomorrow for $20B. But it’s also slow and steady. While year to year results might be a little lumpy due to market trends, AGCO has shown over the last 10 years that they can continue to deliver value to shareholders.
And to be sure: People will always need to eat.
I guess there is some risk from Google growing hamburgers in a petri dish. That said, I’m not sure this is an immediate disruption investors need to realistically worry about. Plus, even if lab-grown protein really does take off, I imagine there will always be a higher end segment of consumers who want REAL animal protein that comes from a farm.
A lot of the risks you might think would face a farm equipment company, AGCO is relatively well insulated against. That’s because they have a diverse global footprint that helps reduce impact from regional events like drought or flood. They also operate at various levels of the farm equipment value chain – so in addition to just tractors they provide the answers to irrigation problems and food storage solutions after harvesting.
Management execution is another risk for AGCO, but again, the 10 year track record says “so far so good.” I wouldn’t blame you for being cautiously optimistic here. As long as AGCO management continues acting diligently and executing effectively with an emphasis on earning high returns on capital I think it’s okay to be a little bullish.
While this analysis is neither a recommendation to buy or sell AGCO or any other security, I hope it has educated you about this agriculture company and whether or not it’s worth further due diligence.
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