AGCO Corporation

AGCO posted a record second quarter as the market for its tractors and combines remained hot worldwide. The company has surprised on earnings for 4 consecutive quarters by an astounding average of 64.61%. This last quarter was no exception, as AGCO blew by Wall Street estimates by 39.58%. AGCO has a forward P/E of 13.00.

Company Description

AGCO Corporation (AG) manufactures and distributes agricultural equipment to customers in 140 countries around the world.

Headquartered in Duluth, GA, AGCO's product line includes tractors, combines, hay tools, sprayers, forage, tillage equipment and implements. Customer service is provided through 3,200 full service dealers worldwide.

The company, a Zacks #1 Rank (Strong Buy), has 4 well-known brands: Massey Ferguson, Valtra, Challenger and Fendt. Massey Ferguson tractors have been produced for more than 160 years.

AGCO Reports a Record Second Quarter

On July 29, AGCO reported record second quarter earnings that beat Wall Street estimates by 39.58%, or 38 cents per share as the agriculture sector remained hot. Net income surged 108% to $133.1 million, or $1.34 per share, compared to $63.8 million, or 67 cents per share, in the year ago period. Analysts expected 96 cents per share.

Sales jumped 40% to a record $2.395 billion from $1.711 billion in the second quarter of 2007. Brazil and the United States continue to be strong as sales grew 27% year-over-year in the South American segment and 34% in the North American segment. Australia also saw an improved harvest which pushed up sales growth 66% in the Asia/Pacific region compared to the second quarter of 2007.

The first half of 2008 was extremely strong for the company.

"Growing demand for food in developing economies and for energy worldwide have grain stocks at their lowest levels in decades," said Martin Richenhagen, Chairman, President and Chief Executive Officer.

"Focus on improved yields and more crop production is generating strong demand for farm equipment in all of the major markets in the first half of 2008. Despite a wet spring and flooding in the Midwest, industry sales in the U.S. remained strong in the higher horsepower segments," he said.

AGCO Issues Bullish Outlook

With a strong first half behind them, AGCO wasn't shy about issuing a bullish forecast for the rest of 2008. The company expects farm equipment demand to increase from strong 2007 levels. In Europe, both Western and Eastern Europe are expected to be strong, resulting in sales above last year's levels.

The United States will see some weakness from the economic slowdown and AG expects to see lower industry retail sales of low and medium horsepower tractors. However, the company sees strong demand for high horsepower tractors and combines from professional farmers.

In South America, Brazil continues to be hot and the company expects increased acreage to produce higher industry retail sales.

AGCO issued an earnings per share forecast in the range of $3.60 to $3.70 and expects to see sales growth between 26% to 28% over 2007 sales.

The company has pricing power which it is using to counteract rising raw material costs. It expects those costs to be significant in the third quarter.

Consensus Estimates Rise for the Full Year

Given the bullish earnings report and full year guidance, covering analysts have been raising estimates on 2008 in the last week. 8 out of 10 covering analysts raised estimates for the full year to an average of $3.71 from $3.40 per share, which is slightly higher than the company's own high-end guidance of $3.70.

For the third quarter, estimates have dropped two cents to 80 cents from 82 cents per share as 2 analysts raised and 5 lowered out of 12 analysts in the last 7 days.

Value Fundamentals

AGCO has a forward P/E of 13.00, under the industry average of 16.56. Its price-to-book is 2.09. The company has an average five year return on equity (ROE) of 10.98%.