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Earnings Beat at AGCO, Shares Fall on Weak Guidance

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Shares of agriculture machinery manufacturer, AGCO Corporation (AGCO - Free Report) slipped 1.39% as the company projected weak demand for 2014 due to reduced farm income. The company guided lower earnings for 2014 as compared with 2013 in its fourth-quarter earnings call on Feb 4.
The company reported adjusted fourth-quarter 2013 earnings of $1.40, up 41% from 99 cents in the year-ago quarter and ahead of the Zacks Consensus Estimate of $1.33. Including one-time earnings in the prior-year quarter, reported earnings of $1.40 were 35% higher than the fourth quarter 2012 GAAP earnings of $1.04.
Operational Update
Revenues in the reported quarter increased 6% year over year to $2.86 billion and surpassed the Zacks Consensus Estimate of $2.83 billion.  Excluding an unfavorable currency translation impact of 0.3%, net revenue increased approximately 6.1%. The top-line growth was mainly driven by strong market demand in Europe/Africa/Middle East and the Asia Pacific region.
Cost of sales increased 4% to $2.27 billion in the quarter from $2.17 billion in the year-ago quarter. Gross profit in the reported quarter was $591 million, up 12% from $528 million in the prior-year quarter. Consequently, gross margin expanded 120 basis points (bps) year over year to 20.7% in the quarter.
Selling, general and administrative expenses amounted to $295 million, up 4% from the year-ago quarter. Segment income from operations increased 36% year over year to $209 million. Consequently, operating margin expanded 160 bps to 7.3% from the prior-year quarter.
Segment Performance
Sales in the North America segment rose 0.9% year over year to $658 million in the quarter. The segment’s income from operations remained flat at $54 million in the quarter.
Sales in the South America segment went down 10% year over year to $461.7 million in the reported quarter. Income from operations for the segment decreased 36% year over year to $32.8 million.
The EAME (Europe/ Africa/ Middle East) segment’s sales were $1,603 million, up 14% from the year-ago quarter. EAME operating income grew 78% year over year to $155.2 million.
Sales in the Asia/Pacific segment rose 3.2% year over year to $137 million from $132 million a year ago. The segment reported a loss from operations of $1.6 million against the year-ago profit of $0.4 million.
Record Sales & Earnings in 2013
Adjusted earnings per share increased 14% year over year to $6.01 in 2013. Earnings not only came in ahead of the Zacks Consensus Estimate of $5.94 per share but also edged past the guidance of $6.00 per share.  Including the effect of one-time items in the prior fiscal, earnings increased 13% to $6.01.
Revenues increased 8% year over year to $10.79 billion, beating the Zacks Consensus Estimate of $10.77 billion. Excluding unfavorable currency translation of approximately 1.2%, net sales increased approximately 9.5% year over year. 
Financial Update
At 2013 end, cash and temporary investments amounted to $1.05 billion versus $781.3 million at the end of 2012. Long-term debt declined to $938 million from $1.03 billion at 2012 end. Debt-to-capitalization ratio decreased to 24% at the end of 2013, from 27% at th end of the prior year. Cash from operations in 2013 was $797 million compared with $666 million in the prior year. 
AGCO cautioned that lower commodity prices in 2014 from 2013 levels will lead to reduced farm income and softer industry demand across the developed agricultural equipment markets. AGCO is projecting net sales in a range of $10.8 billion to $11.0 billion. Pricing benefits and market share improvements are expected to compensate for the expected industry decline.
Benefits from higher gross margins will be offset by higher engineering and market development costs. AGCO thus expects full-year 2014 earnings per share of approximately $6.00. Compared to the 2013 number of $6.01, projected earnings represent a 0.2% year-over-year dip.
Peer Review
Among AGCO’s peers, Briggs & Stratton Corp. (BGG - Free Report) reported adjusted earnings of 5 cents per share, down 29% year over year in the second-quarter fiscal 2014 (ended Dec 29, 2013). The results also lagged the Zacks Consensus Estimate of 10 cents.
Our View
AGCO is set to benefit from strong free cash flow and a focus on earnings growth. AGCO’s strategic investments in production facilities and higher technology products will improve efficiency. The company is expanding its business in international markets. Yet, 2014 will be a challenging year for the company given the decline in demand expected in most of its markets.
Duluth, Georgia-based AGCO is a global leader in the designing, manufacturing 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 has a short-term Zacks Rank #3 (Hold). Some better-ranked stocks in the machinery sector include Manitowoc Company, Inc. (MTW - Free Report) and Terex Corp. (TEX - Free Report) . While Manitowoc carries a Zacks Rank #1 (Strong Buy), Terex has a Zacks Rank #2 (Buy).

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