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AGCO to Gain From Improving Demand & Strategic Investments

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On May 21, we issued an updated research report on AGCO Corporation (AGCO - Free Report) . The company is likely to benefit from recovery in global farm equipment demand, investment in products, technology and capital-allocation plan.

Let’s illustrate these factors.

Upbeat 2019 Prospects

Following an extended period of decline, AGCO anticipates global farm equipment demand to improve modestly in 2019. Thus for the year, the company expects net sales to rise approximately 2% from 2018 levels to $9.5 billion on higher sales volumes and positive pricing. The company now anticipates 2019 adjusted earnings per share of $4.90, up from the previous expectation of $4.60.

Gross and operating margins will be higher compared with 2018 levels, driven by higher sales levels, positive impact of pricing and benefits from cost-reduction initiatives. AGCO expects production to go up 3% in 2019. The company will continue to invest in products and technology, along with improving distribution and enhancing digital capabilities in order to drive margins and returns on invested capital.

The company expects North American industry retail tractor sales to be flat to up 5% in 2019 with improved retail sales in the row crop segment and flat retail sales of small tractors compared with last year. AGCO anticipates industry demand in South America to improve in 2019 from 2018. Higher retail sales in Brazil are expected to drive modest increase in South American industry volumes. Farm economics are expected to improve slightly across Western Europe in 2019, driven by favorable wheat prices and crop production. Consequently, the company expects relatively stable demand in European markets.

Strategic Investments Support AGCO

AGCO is consistently making strategic investments to enhance and expand product lines, upgrade system capabilities and improve factory productivity. In a bid to execute its product development plan and meet new emission requirements in Brazil and Europe, the company intends to maintain level of investment in 2019. Consequently, AGCO expects capital expenditures in 2019 at around $225 million, up from $203 million in 2018. Its spending plan in 2019 will support long-term business growth.

Acquisitions to Boost Growth

AGCO completed two acquisitions in the last two years. In September 2017, it acquired Precision Planting — a leader in innovative planting technology. In October 2017, AGCO purchased the forage division of the Lely Group, which will significantly enhance hay and forage product line in Europe and drive growth in this market.

AGCO’s Solid Capital-Allocation Plan
AGCO is focused on long-term capital allocation plan by returning cash to shareholders. Over the past six and a half years, the company executed share repurchases of $1.2 billion, which reduced share count by more than 20%. In the first quarter of 2019, the company repurchased shares worth $30 million. As of Mar 31, 2019, the remaining amount authorized to be repurchased was approximately $117.1 million. Of this, $115.7 million expires in December 2019 and $1.4 million has no expiration date. The company expects to generate free cash flow within $275 million to $300 million for 2019. Notably, the second half is seasonally stronger for free cash flow. AGCO recently increased its quarterly dividend by 7% to 16 cents per share.

Share Price Performance

Shares of AGCO have increased 0.9% in a year’s time against the industry’s decline of 12.8%.
Zacks Rank & Stocks to Consider
AGCO currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the Industrial Products sector are DMC Global Inc. (BOOM - Free Report) , Lawson Products, Inc. (LAWS - Free Report) and Roper Technologies, Inc. (ROP - Free Report) . While DMC Global and Lawson Products sport a Zacks Rank #1 (Strong Buy), Roper Technologies carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

DMC Global has an estimated earnings growth rate of 79.7% for the ongoing year. The company’s shares have soared 65% in the past year.

Lawson Products has a stellar expected earnings growth rate of 24.5% for the current year. The stock has appreciated 59% in a year’s time.

Roper Technologies has a projected earnings growth rate of 7.9% for 2019. The company’s shares have gained 28%, over the past year.

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