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AGCO Corp Stock Rises 40% YTD: What's Driving the Rally?

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Shares of AGCO Corporation (AGCO - Free Report) have rallied 40.3% year to date, fueled by its forecast-topping earnings performance in third-quarter 2019 and an encouraging outlook for the current year. The company is likely to benefit from margin improvement, focus on strategic investments and capital-allocation plan.

AGCO, a Zacks Rank #3 (Hold) stock, has a market cap of roughly $5.90 billion and average volume of shares traded in the last three months was around 421K. The company has an expected long-term earnings per share growth rate of 13.8% — higher than the industry average of 8.8%.

The company outpaced the Zacks Consensus Estimate in all of the trailing four quarters, the average positive earnings surprise being 32.7%. The stock’s 40.3% year-to-date rise has outperformed the industry’s growth of 13.5%, the sector’s rise of 19.9% and the S&P 500’s rally of 24%.

Let’s delve deeper and analyze the reasons behind the company’s impressive price performance and find out if there is room for further appreciation:

Earnings Top Consensus Mark in Q3: AGCO’s third-quarter 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 sluggish farming conditions in major markets in the quarter.

Upbeat Outlook:  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 has reaffirmed its 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.

Positive 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%.

Growth Drivers

AGCO is consistently making strategic 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 forecasts current-year capital expenditures of roughly $228 million, up from the $203 million recorded 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 the same year, 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 has repurchased shares worth $100 million. The company expects to generate free cash flow of $275-$300 million for 2019.

Stocks to Consider

Some better-ranked stocks in the Industrial Products sector are Northwest Pipe Company (NWPX - Free Report) , Tennant Company (TNC - Free Report) and Sharps Compliance Corp (SMED - Free Report) . All of these stocks sport a Zacks Rank #1 (Strong Buy), 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 46.7% over the past year.

Tennant has a projected earnings growth rate of 29.8% for 2019. The company’s shares have rallied 24.4%, so far this year.

Sharps Compliance has an outstanding estimated earnings growth rate of 500% for the ongoing year. Year to date, the company’s shares have gained 34.3%.

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