AGCO Beats on Q2 Earnings, Shares Fall on Gloomy Outlook - Analyst Blog

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Shares of agriculture machinery manufacturer, AGCO Corporation ( AGCO ) dropped over 5% since it reported a 17.7% year-over-year decline in its second-quarter 2014 earnings to $1.77 per share on Jul 29. Shares closed at $49.31 on Jul 30, a day after the results were announced. However, the earnings per share surpassed the Zacks Consensus Estimate of $1.68 per share.

Operational Update

In the reported quarter, AGCO's revenues decreased 9.8% to $2.8 billion from $3 billion in the year-ago quarter due to falling commodity prices and reduced demand for agricultural equipment. Revenues came in line with the Zacks Consensus Estimate. Excluding a favorable currency translation impact of around 0.3%, net revenue dropped approximately 10%.

Cost of sales declined 9.4% to $2.1 billion from $2.3 billion in the year-ago quarter. Gross profit was $631.5 million in the quarter, down 11% from $710 million in the prior-year quarter. Gross margin was 23%, relatively flat as compared with the prior-year quarter.

Selling, general and administrative expenses amounted to $262 million, declining 6% from the year-ago quarter. Segment income from operations decreased 18% year over year to $276.7 million. Consequently, operating margin contracted 100 bps to 10% from the prior-year quarter due to negative impact of lower sales and production volumes and higher engineering expenses.


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Segment Performance

Sales in the North America segment declined 13% year over year to $686.2 million in the quarter. The segment's income from operations fell 21.5% year over year to $95.5 million.

Sales in the South America segment fell 18.5% year over year to $440 million. Income from operations for the segment decreased 50% year over year to $29.9 million.

The EAME (Europe/ Africa/ Middle East) segment's sales were $1,521.9 million, down 4.8% from the year-ago quarter. EAME's operating income reduced 8.2% year over year to $188 million.

Sales in the Asia/Pacific segment declined 15% year over year to $102 million from $120 million a year ago. The segment reported a loss from operations of $3.3 million wider than the year-ago quarter's loss of $0.8 million.

Financial Update

AGCO ended the second quarter with cash and cash equivalents of $323 million, down substanitially from $1047.2 million as of 2013-end. Cash used in operating activities for the period of six months ended Jun 30, 2014 was $254 million compared with cash flow from operations of $65 million in the year-ago period. Cash used in the first half of 2014 resulted from higher levels of working capital.

Long-term debt was $1.07 billion as of Jun 30, 2014, compared with $1.05 billion as of Dec 31, 2013. The debt-to-capitalization ratio remained flat at 21% as of Jun 30, 2014.

AGCO has significantly expanded its share repurchase program to $500 million, which is to be completed by mid-2015. During the first quarter of 2014, the company entered into two accelerated share repurchase agreements for approximately $290 million. Through the end of Jun, AGCO received approximately 4.2 million shares.

Guidance

AGCO believes that the global industry demand will soften in 2014 in comparison with 2013. AGCO lowered full year industry forecast across its three major regional markets. In North America, forecasts for lower farm income are expected to result in softer demand from the professional farming sector. The company lowered South American industry forecast which reflects FINAME funding interruptions, a weaker sugar sector and lower demand in Argentina. In Western Europe, AGCO remains concerned about demand declines in the arable farming sector and forecasts more significant drops in the demand for higher horsepower equipment. AGCO is projecting 2014 sales to be down about 5% compared with 2013 due to the impact of softer market conditions

Based on this, the company trimmed its full-year 2014 earnings per share to approximately $5.00 from $6.00. Net sales guidance has also been slashed and now stands in the range of $10.1-$10.3 billion from $10.8-$11.0 billion.

The company anticipates second-quarter 2014 sales volumes will fall due to adjustments in dealer and company inventory levels. This, along with a weaker sales mix, is expected to lead third-quarter 2014 earnings per share in the range of 75 to 80 cents. Additionally, capital expenditures for 2014 will be $400 million and free cash flow is projected to be $250 million.

However, AGCO is forecasting GSI sales to be up approximately 10% for the full year of 2014 compared with 2013 with most of the growth occurring outside the U.S.

AGCO expects economic conditions to improve for dairy and livestock producers. New products and purchasing initiatives will also help in the company's growth. Working capital reduction throughout 2014 remains the key areas of focus for the company. AGCO is also targeting to increase productivity and deliver high-tech solutions to help farmers to improve their efficiency.

Our View

AGCO is set to benefit from growing population, increasing protein consumption in the emerging markets and use of biofuel which are expected to positively support grain demand and growth. We expect the company's continuous efforts toward production improvement, management of inventory levels, reduction of operating expenses and cash flow generation to drive long term growth. Moreover, AGCO's expansion of its business in the international markets bodes well for the company's future.

AGCO remains confident about long-term agricultural fundamentals. Further improvements in farm productivity and yields will be needed to meet the growing demand for food and biofuel requirements. The company expects these developments to support favorable conditions in the future.

Nevertheless, 2014 will be a challenging year for the company due to the expected decline in demand across most of its markets. Negative impact of lower volumes and weaker product mix will also remain matters of concern.

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

Currently, AGCO has a Zacks Rank #4 (Sell). Some better-ranked machinery makers worth considering include Kubota Corporation ( KUBTY ), Blount International Inc. ( BLT ) and Graphic Packaging Holding Company ( GPK ). While Kubota Corporation and Blount International sport a Zacks Rank #1 (Strong Buy), Graphic Packaging holds a Zacks Rank #2 (Buy).


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.




This article appears in: Investing , Business , Earnings , Stocks

Referenced Stocks: AGCO , KUBTY , GPK , BLT

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