AGCO Remains at Neutral - Analyst Blog

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AGCO Remains at Neutral

On Nov 8, we maintained our Neutral recommendation on AGCO Corporation ( AGCO ). AGCO will benefit from its international expansion plans, healthy farm income and increased demand for grain storage. However, peak demand conditions, which were benefiting North America results of this leading manufacturer and distributor of agricultural equipment, may be unsustainable going forward. Furthermore, margin headwinds remain in the form of increased engineering expenditures to meet Tier 4 emission requirements.

Why Reiterated?

AGCO's third-quarter 2013 earnings increased 32% to $1.27 a share and revenues increased 8% to $2.5 billion, mainly driven by higher sales in South America and in the Asia Pacific region. For 2013, AGCO projects earnings per share of $6.00 and revenues in the range of $10.8 to $11 billion. Strong growth in South America and modest growth in North America is expected to be offset by modest declines in Western Europe. Global industry demand is expected to be relatively flat in 2013 compared to 2012.

The company remains committed to its plans of expanding in the Commonwealth of Independent States (CIS), China, and Africa, given the considerable growth prospects in these markets where immense areas of farmland are currently under cultivation with less efficient machinery. In September, AGCO entered into a 50-50 joint venture with Russian Machines to manufacture and distribute agricultural equipment and replacement parts in Russia. This is a significant step in AGCO's growth strategy for the Russian market.

The U.S. Department of Agriculture (USDA) expects a record net farm income of $120.6 billion in 2013, a 6% year-over-year rise triggered by record crop production. This will be the second highest inflation-adjusted amount since 1973. This will support increased farm incomes, which in turn compels farmers to continually upgrade and expand their fleets and sustain stable equipment demand.

GSI sales increased about 9% in the third quarter and the U.S. grain storage sales showed improvement in the third quarter compared to last year's drought-impacted results and contributed to most of GSI's third quarter increase. For 2013, GSI sales is expected to be up between 5% and 7%. The large harvest will require farmers to add storage capacity. Longer term, the global trends of population growth and changing diets will create demand for additional grain storage and protein production capacity.

On the flipside, AGCO's North American operating performance has outperformed year to date. However, the peak demand conditions that benefited North America results may be unsustainable going forward.

AGCO has also delivered strong performance in South America and orders were also up year over year. The weaker Brazilian real and FINAME financing with low rates have helped Brazilian farmers. The FINAME financing programs have not yet been finalized for 2014. Increase in rates may affect equipment demand. Furthermore, margins will be under pressure as engineering expenditures are expected to increase as the company strives to meet Tier 4 emissions requirements.

Other Stocks to Consider

AGCO retains a short-term Zacks Rank #3 (Hold). Other machinery makers with favorable Zacks ranks are Xylem Inc. ( XYL ) with a Zacks Rank  #1 (Strong Buy), DXP Enterprises, Inc. ( DXPE ) and H&E Equipment Services Inc. ( HEES ), which retain a Zacks Rank #2 (Buy).



AGCO CORP (AGCO): Free Stock Analysis Report

XYLEM INC (XYL): Free Stock Analysis Report

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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 , Stocks

Referenced Stocks: AGCO , CIS , XYL

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