AGCO Corporation (AGCO - Free Report) has been displaying an impressive show, driven by its stellar earnings performance in the September-end quarter as well as benefit from margin improvement, investment in products, technology, and a solid capital-allocation plan. However, a reduced market outlook, elevated expenses and unfavorable foreign currency are key concerns.
AGCO’s shares have appreciated 34.5% over the past year, outperforming the industry’s growth of 17.2%. The company has an estimated long-term earnings growth rate of 13.7%.
The company currently has a Zacks Rank #3 (Hold) and a VGM Score of B. Our research shows that stocks with a VGM Score of A or B combined with a Zacks Rank #1(Strong Buy) or 2 (Buy), offer the best investment opportunities.
Below, we briefly discuss the company’s potential growth drivers and possible headwinds.
What’s Working in Favor of AGCO?
Earnings Beat Consensus Mark in Q3:
AGCO’s third-quarter 2019 adjusted earnings per share of 82 cents surpassed the Zacks Consensus Estimate of 78 cents. The company gained from its price-realization initiatives, improved productivity and focus on margin expansion amid a challenging market environment in the quarter.
Positive Earnings Surprise History
AGCO outpaced the Zacks Consensus Estimate in the trailing four quarters, the average positive earnings surprise being 32.7%.
In 2019, AGCO anticipates gross and operating margins to be higher than 2018 levels, as the positive impact of pricing and benefits from cost-reduction initiatives are likely to offset the negative impact of foreign currency translation and relatively flat sale volumes. Considering these, AGCO reaffirmed adjusted earnings per share guidance of $5.10 for the current year, up from the previous expectation of $4.90. Furthermore, AGCO is likely to witness growth in its grain and protein business, backed by expectations of an increase in population and higher protein consumption.
Healthy Growth Projections
For 2019, the Zacks Consensus Estimate is currently pegged at $5.06, indicating a year-over-year jump of 30.1%. The same for 2020 is pegged at $5.58, calling for year-over-year growth of 10.4%.
Return on Assets
AGCO currently has a Return on Assets (ROA) of 4.8%, while the industry recorded ROA of 4.5%. An above-average ROA denotes that the company is generating earnings by effectively managing assets.
AGCO’s trailing 12-month EV/EBITDA ratio is 8.3, while the industry's average trailing 12-month EV/EBITDA is 10.8. Consequently, the stock is cheaper at this point based on the ratio.
AGCO’s price-to-earnings ratio suggests that shares are underpriced currently, which seems to be attractive to investors. The company has a trailing P/E ratio of 16.6, below the industry's average of 17.9.
Growth Drivers in Place
AGCO is consistently making investments to enhance and expand its product lines, upgrade system capabilities and improve factory productivity. In a bid to execute its product-development plan and meet the latest emission requirements in Brazil and Europe, the company intends to increase the investment level in 2019. Consequently, AGCO expects current-year capital expenditures of roughly $228 million, up from the $203 million in 2018.
AGCO has completed two acquisitions in the past two years. In September 2017, it acquired Precision Planting — a leader in innovative planting technology. In October 2017, AGCO purchased the forage division of Lely Group, which significantly boosted its hay and forage product line in Europe, fueling growth in this market.
The company is focused on its long-term capital allocation plan by returning cash to shareholders. Over the past six years, the company executed share repurchases of $1.3 billion, which reduced share count by more than 25%. In the first nine months of 2019, it repurchased shares worth $100 million. The company expects to generate free cash flow of $275-$300 million for 2019.
Headwinds for AGCO
A late harvest and an early winter are keeping corn and soybean harvests in North America under pressure. Consequently, AGCO expects the North American industry retail tractor sales to be relatively flat in 2019 compared to the last year. Additionally, the U.S Agriculture industry has been grappling with low commodity prices and sluggish farm incomes. Tariffs imposed by China on U.S. agricultural exports last year dealt a severe blow, given that China is the largest export market for U.S. agriculture producers. This along with late planting and slow crop development made farmers more cautious about spending on farm equipment. Also, China hiked some tariffs again in September. These factors are likely to affect AGCO’s revenues.
Further, AGCO’s results continue to be impacted by higher engineering expenses and foreign currency translation. These will continue to dampen the company’s results for the current year.
Investors might want to hold on to the stock, at present, as it has ample prospects of outperforming peers in the near future.
Stock to Consider
Some better-ranked stocks in the Industrial Products sector are Northwest Pipe Company (NWPX - Free Report) , Tennant Company (TNC - Free Report) and Casella Waste Systems, Inc. (CWST - Free Report) . While Northwest Pipe and Tennant sport a Zacks Rank #1, Casella Waste Systems carries a Zacks Rank #2, at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
Northwest Pipe has an expected earnings growth rate of 15.8% for the current year. The stock has appreciated 43.4% in a year’s time.
Tennant has a projected earnings growth rate of 29.8% for 2019. The company’s shares have rallied 21.9% over the past year.
Casella Waste Systems has an estimated earnings growth rate of 37.7% for the ongoing year. The company’s shares have gained 41.6% in the past year.
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