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AGCO's Earnings Miss Estimates, Shares Fall

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Shares of AGCO Corporation (AGCO - Free Report) fell 9% since the company reported its third-quarter 2013 earnings on Oct 29 and said that it expects global industry demand to be flat in 2013. Even though earnings improved 32% to $1.27 per share from the prior-year quarter, it missed the Zacks Consensus Estimate of $1.29.

Operational Updates

Revenues in the reported quarter increased 7.9% year over year to $2.5 billion and was in line with the Zacks Consensus Estimate.  Excluding an unfavorable currency translation impact of 1.8%, net revenue increased approximately 9.7%. The top-line growth was mainly driven by strong market demand in South America and the Asia Pacific region.

Cost of sales increased 6% to $1.9 billion in the third quarter from $1.8 billion in the year-ago quarter. Gross profit in the reported quarter was $556 million, up 13% compared with $491 million in the prior-year quarter. Consequently, gross margin expanded 110 basis points (bps) year over year to 22.5% in the quarter.

Selling, general and administrative expenses amounted to $258 million, down 1.8% from the year-ago quarter. Segment income from operations increased 43% year over year to $199 million. Consequently, operating margin expanded 190 bps to 8% from the prior-year quarter.

Segment Performance

The North America segment’s sales rose 9% year over year to $687 million in the quarter led by increased sales of high horsepower tractors, sprayers and implements. The segment’s income from operations improved 30% to $78 million from $60 million attributed to higher sales, a favorable product mix and margin improvement initiatives.

Sales in the South America segment went up 19% year over year to $572 million in the reported quarter, driven by increased sales in Brazil and Argentina. Income from operations for the segment increased 60% year over year to $71.9 million. Higher sales and the benefit of cost reduction initiatives contributed to the year-over-year growth.

The EAME (Europe/ Africa/ Middle East) segment’s sales were $1,086 million, up 2% from the year-ago quarter. The EAME operating income grew 20% year over year to $98.4 million.

Sales in the Asia/Pacific segment rose 7% year over year to $130.6 million from $122.4 million. The segment reported a loss from operations of $2.6 million against the year-ago profit of $3.8 million.

Financial Update

As of Sep 30, 2013, cash and temporary investments amounted to $620.5 million versus $781.3 million as of Dec 31, 2012. As of Sep 30, 2013 long-term debt declined to $1.0 billion compared with $1.03 billion as of Dec 31, 2012. Debt-to-capitalization ratio decreased to 22% as of Sep 30, 2013, from 24% as of Dec 31, 2012.

Cash from operations for the nine-month period ended Sep 30, 2013, was $169 million, while cash used in operating activities was $33.2 million in the year-ago comparable period.


AGCO reiterated its full-year 2013 earnings per share guidance of $6.00. The company also maintained full-year revenue band of $10.8–$11 billion. Strong growth in South America and modest growth in North America is expected to be offset by modest declines in Western Europe. Global industry demand is expected to be relatively flat in 2013 compared to 2012.

AGCO also expects gross margin to improve in 2013 compared with 2012, but will be somewhat affected by increased market development expenses, and higher engineering expenditures to meet Tier 4 final emission requirements. The company also projects capital expenditures to be in the $400–$425 million range and free cash flow to be in the band of $200–$250 million.

Our View

AGCO will benefit from strong free cash flow and its focus on earnings growth. The long-term outlook for the farming industry is also compelling. AGCO’s continuous focus on strategic investments in production facilities and higher technology products will improve efficiency.

The company remains committed to plans of expanding its business in international markets. In September, AGCO entered into a 50-50 joint venture to manufacture and distribute agricultural equipment and replacement parts in Russia.

In late September, AGCO purchased Johnson System Inc., a leader in structural steel manufacturing having a focus on the agricultural industry. AGCO will benefit from Johnson System’s experience in the grain handling business and its full range of reputed products and custom-design options that can meet the unique and specific needs of any project.

Duluth, GA-based AGCO is a global leader involved in the design, manufacture and distribution of agricultural machinery. AGCO supports productive farming through a wide range of tractors, combines, hay tools, sprayers, forage equipment, tillage, implements, grain storage and protein production systems, and other related replacement parts.

AGCO currently retains a short-term Zacks Rank #2 (Buy). Deere & Co (DE - Free Report) also belongs to the machinery and farming industry and holds a Zacks Rank #2 (Buy).

Among AGCO’s peers, Briggs & Stratton Corp. (BGG - Free Report) reported adjusted loss per share of 35 cents for first-quarter fiscal 2014. This compares unfavorably with the Zacks Consensus Estimate of loss per share of 31 cents and 28 cents loss in the year-ago quarter. Another competitor, Alamo Group, Inc. (ALG - Free Report) is expected to announce its third-quarter results on Nov 7. The Zacks Consensus Estimate currently stands at 80 cents, reflecting annual growth of 11.97%.

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