Technology

Agco (AGCO) Up 6.8% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Agco (AGCO). Shares have added about 6.8% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Agco due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

AGCO Corp Beats on Q2 Earnings & Sales, Initiates View

AGCO delivered second-quarter 2020 adjusted earnings per share of $1.11, down 39% year over year. The figure, however, handily beat the Zacks Consensus Estimate of 7 cents.

Including one-time items, the company reported net income of 93 cents per share in the second quarter compared with the $1.82 per share recorded in the prior-year quarter.

Revenues declined 17.2% year over year to $2,007 million in the June-end quarter. However, the revenue figure beat the Zacks Consensus Estimate of $1,743 million. Excluding unfavorable currency-translation impact of 3.9%, net sales decreased 13.2% year over year.

Operational Update

Cost of sales dropped 15.3% to $1,574 million in the second quarter from the year-earlier period. Gross profit declined 23.2% year over year to $433 million during the April-June quarter. Gross margin came in at 21.6% compared with the prior-year period’s 23.3%.

Selling, general and administrative expenses slid to $219.5 million from the year-ago quarter’s $260.7 million. Adjusted income from operations plunged 39.3% year over year to $121.2 million. Consequently, operating margin came in at 6% compared with the year-earlier quarter’s 8%.

Segment Performance

Sales in the North America segment slipped 10.2% year over year to $556 million during the April-June period. The segment reported operating income of $65 million compared with the prior-year quarter’s $51 million.

Sales in the South America segment were down 3.9% year over year to $179 million. The segment reported an operating profit of $5.5 million, as against the prior-year quarter’s operating loss of $7.1 million.

The EME (Europe/Middle East) segment’s sales came in at $1,125 million compared with the $1,457 million recorded in the year-ago period. The EME’s operating income plummeted 56.5% year over year to $91 million.

Sales in the Asia/Pacific segment were down 8% year over year to $148 million. The segment reported operating profit of $14 million compared with the year-ago quarter’s $7 million.

Financial Update

AGCO reported cash and cash equivalents of $404 million as of Jun 30, 2020, down from the $433 million recorded as of Dec 31, 2019. The company utilized $221.6 million of cash in operating activities during the first half of the current year compared with the $212.9 million in the first half of 2019.

Guidance

The company expects net sales for the current year to be between $8.3 billion and $8.4 billion, reflecting bleak end-market demand and the unfavorable impact of currency translation. Adjusted operating margins are expected to be below 2019 levels due to the impact of lower production and sales volumes, partly offset by the benefits from cost reductions. Based on these, AGCO expects adjusted earnings per share (EPS) for the current year between $3.50 and $3.75.

Global crop production remains strong and is set for another record crop year with farm operations working at normal levels. Nevertheless, consumption of grain for food, fuel and livestock feed is being negatively impacted by the economic constraints caused by the pandemic. Consequently, global industry demand for farm equipment is expected to be weaker in the remaining period of this year due to the challenging farm economics and uncertainty caused by the pandemic.

Meanwhile, replacement demand for aged fleet in the large farm, lower commodity prices and a cautious farmer sentiment are influencing farm-equipment demand. The USDA’s $16-billion COVID-19 Aid Package for U.S. farmers and livestock is also likely to offset the negative impact of lower commodity prices to some extent. Moreover, AGCO remains focused on investing in premium technology, smart farming solutions and enhanced digital capabilities for customers.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month. The consensus estimate has shifted 113.75% due to these changes.

VGM Scores

At this time, Agco has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Agco has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.


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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 Nasdaq, Inc.

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