Skip to main content

AGCO -- is there any upside left?

The agricultural equipment sector has been strong this year and appears to be one of the sectors that may provide some relief for stressed investors in this difficult market.

The John Deere Company (DE) recently reported strong earnings that gave the whole market a boost on the day the numbers were announced. Sales in agricultural equipment were very strong though construction equipment sales were somewhat under pressure. Deere provided solid forward guidance despite the risk of a falloff in the market for building construction equipment.

Everyone is familiar with Deere but a lesser known player is AGCO (AG).

AGCO company background --

Here are a few excerpts from the AGCO company profile at Yahoo Finance:

"AGCO Corporation manufactures and distributes agricultural equipment and related replacement parts worldwide. The company's products include tractors, combines, self-propelled sprayers, hay tools, forage equipment, and implements, as well as a line of diesel engines. ...the company provides precision farming technologies that enable farmers to gather information, such as yield data by utilizing satellite global positioning systems... The company markets its products under various brands, including AGCO, Challenger, Fendt, Gleaner, Hesston, Massey Ferguson, New Idea, RoGator, Spra-Coupe, Sunflower, Terra-Gator, Valtra, and White Planters."

What is significant is that AGCO is more of a pure play on the agricultural equipment sector than Deere. Whereas Deere is somewhat dependent on its analysis that housing will hit bottom in 2008 and construction equipment sales will firm, AGCO has no exposure to this sector. AGCO is focused exclusively on agriculture where a commodities boom has been playing out and providing a solid underpinning for strong sales.

Looking at the chart below, it can be seen that in recent months AGCO has outperformed Deere, the industry bellwether.

Also evident in the chart above, it can be seen that the stock gapped upward at the end of October. This is when it reported Q3 EPS of 77 cents and revenues of $1.61 billion. Analysts had been expecting 47 cents and $1.36 billion. The CEO said that robust farm equipment markets drove strong sales growth and improved operating results. Management also guided FY07 EPS to $2.10-2.20, versus analyst consensus of $1.77 and versus AGCO own expectations back in July of $1.55 to $1.60 per share.

Can the stock go higher?

It would appear AGCO is hitting on all cylinders. Still, there are a few questionable aspects. AGCO is a complicated company, made up of numerous acquisitions. When looking at quarterly financial statements, there is a fair amount of inconsistency. You can see how in Q3 net income surged compared to Q2 yet operating income and revenues were lower in Q3 than in Q2. The quarter was saved by lower interest expense and lower taxes in the United Kingdom and Germany. Are we running into a problem with organic growth?

The other factor that worries me about AGCO is that its stock price is up so much more in percentage terms than the agricultural commodities indexes. Commodities have been in a strong bull market this year. Using either the PowerShares DB Agriculture ETF (DBA) or the PowerShares DB Commodity Index Tracking Fund ETF (DBC) as proxies, it appears commodities are up around 25% in 2007. On the other hand, AGCO is up close to 90% so far in 2007. At some point, it would make sense for a company that is so closely tied to the profitability of the agricultural markets to more closely track those agricultural markets.

Given the negative tone of the markets in general, the questions around organic growth and the strong possibility the stock has gotten ahead of itself and the agricultural markets, I think we may have seen the highs for AGCO.

Disclosure: author owns no shares of AG, DE, DBA or DBC


Popular posts from this blog

Brazil - in a bubble or on a roll?

A couple of years ago, no one recognized the real estate bubble even though it was under everyone's nose. Now, analysts and bloggers are seeing bubbles everywhere they look. One of them, they say is in Brazil whose Bovespa stock market index has doubled in the last 12 months. Does the bubble accusation hold water? I don't think so and here are 7 reasons why Brazil is by no means a bubble economy: Exports have held up over the past year thanks to demand from China for Brazil's soya exports and iron ore. This was helped by the the Brazilian government's drive to improve trade links with Asia and Africa. Export diversification, spurred by a more active trade policy and increased focus on "south-south" trade under current president Lula, helped mitigate the decline in demand from OECD (Organization for Economic Co-operation and Development) countries A "sensible" economic framework has been in place since the 1990's. This has included inflation

Thursday Bounce: Trend Busters, Swing Signals and Trend Leaders for July 9, 2009

This is a quick post to announce that we have published Thursday's Trend Leaders, Swing Signals and Trend Busters at Alert HQ . All are based on daily data. Today we have the following: 72 Swing Signals -- A couple of days ago we had 35 signals, today we have twice as many. Happily, we now have 65 BUY signals, a mere 4 SELL Signals plus 3 Strong BUYs. Whoo-hoo! 56 Trend Leaders , all in strong up-trends according to Aroon, MACD and DMI. There are 18 new stocks that made today's list and 60 that fell off Tuesday's list. 48 Trend Busters of which 5 are BUY signals and 43 are SELL signals The view from Alert HQ -- Talk about mixed signals. If you look at our Swing Signals list you would think the market was in the middle of a big bounce. BUY signals are swamping the SELL signals and we even have a few Strong BUYs. Yes, there's a good sprinkling of tech stocks and tech ETFs but the distribution is pretty broad-based with a good number of different sectors represented, eve

Trade Radar gets another update

Some of our data sources changed again and it impacted our ability to load fundamental/financial data. In response, we are rolling out a new version of the software: 7.1.24 The data sourcing issues are fixed and some dead links in the Chart menu were removed. So whether you are a registered user or someone engaged in the free trial, head over to our update page and download the latest version. The update page is here: Contact us if you have questions or identify any new issues.