AGCO’s Outlook Remains Weak

Last week, AGCO Corp. (AGCO - Analyst Report) reported third-quarter results. The company posted earnings of 13 cents per share, compared $1.01 per share in the prior-year quarter. The significant decline in quarterly earnings was driven by lower sales volumes, weaker product mix and the negative impact of currency translation.

Net sales in the quarter were $1,403.7 million, down 32.7% compared to the third quarter of 2008. AGCO is experiencing soft demand conditions in most of its markets. Lower commodity prices, along with expectations of decreased farm income, are hampering investments in farm equipment around the world. AGCO is aggressively cutting production in order to reduce its own and dealer’s inventories.

Sales in North America were down 31.9% on a constant currency basis due to weaker sales of low horsepower tractors and hay products, as well as reduction in dealer inventory. Unit retail sales of lower horsepower tractors were down due to weakness in the landscaping, residential construction and dairy sectors. This weakness is expected to continue for the remainder of the year.

In the EAME region, quarterly sales were down 30.3%, excluding the impact of foreign currency translation, due to lower volumes in Eastern Europe, Russia, France, Germany, Finland and Scandinavia. The company experienced major demand weakness from the diary and livestock sectors.

Sales from the South American region were down 20.5% (excluding foreign currency exchange impact) due to due to dry weather conditions and the impact of tightened credit on planted acreage and car production. The company saw improved demand conditions in Brazil during the quarter as the Brazilian government’s special financing plan for small farms continued to stimulate sales of lower horsepower tractors.

AGCO expects full year revenue in the range of $6.4 - $6.6 billion, compared to $8.4 billion in 2008. The revenue forecast includes unfavorable currency translation impacts of approximately $500 - $600 million. The company anticipates full-year EPS in the range of $1.30 - $1.50. We concur with the company that the demand for farm equipment is not expected to recover in the near-term.

We maintain an Underperform rating on the stock.