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On March 22, Zacks Investment Research downgraded AGCO Corporation (AGCO - Analyst Report), a manufacturer of agricultural equipment, to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

Shares of AGCO fell 1.39% after the company projected weak demand outlook for 2014 in its fourth-quarter 2013 earnings call on Feb 4, due to reduced farm income.

Despite adjusted earnings in the fourth quarter improving 41% year over year to $1.40, AGCO reiterated its full-year 2013 earnings per share guidance of $6.00, reflecting a 0.2% year-over-year dip. The absence of an extension of current depreciation tax benefits beyond 2013 (in the U.S.) and potential FINAME borrowing cost increases (in Brazil) could put pressure on AGCO’s earnings. In addition, the company anticipates the benefits from higher gross margins to be offset by higher engineering and market development costs.

Total unit production for AGCO increased about 5% in from 2012. The company expects production volumes for the full year 2014 to be flat as compared with 2013, with decline in higher horsepower equipment balanced by increase in lower horsepower machines.

In addition, product demand is expected to deteriorate in the near term due to fall in farm income and crop prices as well as a less favorable renewable fuel standard (RFS). Notably, the RFS is likely to pull down the demand of corn, thereby adversely affecting the need for agricultural equipment as well.

Moreover, strong growth in South America and a modest performance in North America are expected to be offset by a moderate decline in Western Europe.

Other Stocks to Consider
Other machinery makers with a better Zacks Rank include Alamo Group, Inc. (ALG - Snapshot Report), Xylem Inc. (XYL - Analyst Report) and Altra Industrial Motion Corp. (AIMC - Snapshot Report). All of these have a Zacks Rank #2 (Buy).

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