February 05, 2015 AGCO Corporation Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Underperform Date of Last Change 12/28/2014 Current Price (02/03/15) $48.96 Target Price $51.00 52-Week High $57.28 52-Week Low $42.08 One-Year Return (%) -7.36 Beta 1.97 Average Daily Volume (sh) 1,212,559 Shares Outstanding (mil) 92 Market Capitalization ($mil) $4,504 Short Interest Ratio (days) 12.93 Institutional Ownership (%) N/A Insider Ownership (%) N/A Annual Cash Dividend $0.44 Dividend Yield (%) 0.92 5-Yr. Historical Growth Rates Sales (%) 13.3 Earnings Per Share (%) 36.5 Dividend (%) N/A using TTM EPS 10.4 using 2015 Estimate 16.8 using 2016 Estimate 15.3 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page SUMMARY Risk Level * (AGCO-NYSE) AGCO Corporation reported a 16% year-over-year decline in its fourth-quarter 2014 earnings to 1.18 per share due to significant production cuts and negative effect of currency translation. AGCO guided full year 2015 net sales in the range of $8.1 to $8.3 billion and earnings per share of approximately $3.00, reflecting the impact of softer market conditions, unfavorable currency translation and lower commodity prices. Weaker sales mix and production volumes will also affect growth in the near term. However, AGCO is poised to benefit from investment in new product development, distribution enhancements and productivity improvements. Additionally, focus on restructuring and cost reduction initiatives will drive growth. Thus, we are reiterating our Neutral recommendation on AGCO with a target price of $51. Below Avg., Type of Stock Large-Value Industry Mach-Farm Zacks Industry Rank * 27 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 2,403 A 3,048 A 2,476 A 2,860 A 10,787 A 2014 2,333 A 2,750 A 2,155 A 2,485 A 9,724 A 2015 1,843 E 2,300 E 1,919 E 2,143 E 8,205 E 2016 8,425 E Note: 2014 Quarterly Figures will not add up due to rounding off Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $1.19 A $2.15 A $1.27 A $1.40 A $6.01 A 2014 $1.03 A $1.77 A $0.71 A $1.18 A $4.70 A 2015 $0.45 E $1.17 E $0.60 E $0.70 E $2.92 E 2016 $3.21 E Note: 2014 Quarterly Figures will not add up due to rounding off Projected EPS Growth - Next 5 Years % 10 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
RECENT NEWS AGCO Tops Q4 Earnings, Lags Y/Y on Production Cuts Feb 3, 2015 AGCO Corporation reported a 16% year-over-year decline in its fourth-quarter 2014 earnings to 1.18 per share. However, earnings surpassed the Zacks Consensus Estimate of $0.65 per share. Weaker markets caused significant production cuts, which, along with the negative effect of currency translation impacted growth, which was partly offset by its inventory reduction and expense saving program. Including restructuring and other infrequent expenses, earnings in the reported quarter stood at $0.85 compared with $1.40 in the year-ago quarter. Operational Update In the reported quarter, AGCO s revenues decreased 13% to $2.5 billion from $2.9 billion in the year-ago quarter. Revenues beat the Zacks Consensus Estimate of $2.4 billion. Excluding unfavorable impact of around 7% from currency translation, net revenue dropped approximately 6% in the fourth quarter. Cost of sales declined 12% to $1.98 billion from $2.27 billion in the year-ago quarter. Gross profit was $498 million in the quarter, down 15.7% from $591 million in the prior-year quarter. Gross margin was 20%, a 70 basis point contraction year over year. Selling, general and administrative expenses amounted to $244 million, declining 17% from the year-ago quarter. Segment income from operations decreased 19% year over year to $158.9 million. Consequently, operating margin contracted 50 bps to 6.4%. Segment Performance Sales in the North America segment declined 16.5% year over year to $549 million in the quarter. The segment s income from operations fell 43% year over year to $30.9 million. Sales in the South America segment fell 10.2% year over year to $414.6 million. Income from operations for the segment increased 21% year over year to $39.8 million. The EAME (Europe/ Africa/ Middle East) segment s sales were $1,375 million, down 14% from the yearago quarter. EAME s operating income reduced 13.5% year over year to $134 million. Sales in the Asia/Pacific segment increased 7% year over year to $146.7 million from $137 million a year ago. The segment, however, reported a loss from operations of $5.9 million, wider than the year-ago quarter loss of $1.6 million. Financial Update AGCO had cash and cash equivalents of $363.7 million at the end of 2014, compared with $1,047 million at 2013-end. The company generated cash flow from operations of $438 million in 2014, down from $797 million in 2013. The company s total debt increased to $997.6 million as of Dec 31, 2014 from $938 million as of Dec 31, 2013. The debt-to-capitalization ratio was 23.8% in 2014, compared with 23.6% in 2013. In Dec 2014, AGCO authorized new accelerated repurchase agreements ( ASRs ) of $500 million. The company received approximately 10,066,322 shares during 2014. Moreover, of the total $1,050 million in Equity Research AGCO Page 2
approved share repurchase programs, the remaining amount authorized to be repurchased is approximately $531.7 million. In Jan 2015, AGCO announced a 9% dividend hike to $0.12 per share, effective first-quarter 2015. 2014 Performance AGCO posted adjusted earnings of $4.70 per share for 2014, which plunged 22% year over year. Earnings also fell short of the Zacks Consensus Estimate of $4.17 per share. However, it came ahead of management s guidance range of $4.10 to $4.30 per share. Including special items, earnings were $4.36 per share for the year, compared with $6.01 in 2013. Revenues for the full year decreased 9.8% year over year to $9.7 billion from $10.8 billion in 2013. Revenues came in line with the Zacks Consensus Estimate. 2015 Guidance In 2015, AGCO expects earnings per share for 2015 to be approximately $3.00. Lower commodity prices relative to 2014 are expected to negatively impact farm income, pressuring industry demand across the developed agricultural equipment markets. Further, weaker end market demand and currency headwinds will impact growth. AGCO guided net sales for the full year in the range of $8.1 to $8.3 billion, reflecting the impacts of softer market conditions and unfavorable currency translation. The company remains concerned about gross and operating margins for 2015, which are expected to be below 2014 levels due to the negative impact of lower sales and production volumes along with a weaker sales mix. Benefits from the company s restructuring and other cost reduction initiatives are expected to partially offset the volume related impacts. AGCO also stated that earnings per share in the first quarter of 2015 will be significantly lower than the first quarter of 2014 due to decreased production levels associated with inventory reduction efforts. However, AGCO s continuous focus on margin performance and cash generation will support growth. The company is poised to benefit in the long-term from investment in new product development, distribution enhancements and productivity improvements. Upturn in financial performance and supply of superior products and services to customers will also drive growth. Equity Research AGCO Page 3
VALUATION AGCO Corporation is currently trading at 16.8x our fiscal 2015 earnings estimate. The company s trailing 12-month earnings multiple is 10.4x, compared with the 15.7x average for the peer group and 18.8x for the S&P 500. Over the last five years, the company s shares have traded in the range of 7.5x to 27.6x trailing 12-month earnings. We are retaining our Neutral reccomendation on AGCO Corporation, which indicates that it will perform in line with the overall market. Our $51 target price, 17.5x our 2015 EPS estimate, reflects this view. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low AGCO Corporation (AGCO) 16.8 15.3 8.6 6.2 10.4 27.6 7.5 Industry Average 16.7 19.9 11.4 9.7 15.7 48.0 9.7 S&P 500 16.3 15.4 10.7 15.0 18.8 19.4 12.0 Kubota Corporation (KUBTY) 16.0 13.7 9.3 11.2 14.5 35.6 12.2 Deere & Company (DE) 16.1 16.6 8.6 7.1 10.3 20.5 9.0 Titan International Inc. (TWI) N/A 49.8 17.5 4.4 N/A 93.4 8.3 Briggs & Stratton Corporation (BGG) 16.0 13.2 N/A 9.2 16.5 30.5 10.5 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA AGCO Corporation (AGCO) 1.1 1.9 1.0 12.0 0.3 1.0 4.6 Industry Average 1.7 1.7 1.7 11.5 0.6 1.0 6.0 S&P 500 5.3 9.8 3.2 25.5 N/A 2.1 N/A Equity Research AGCO Page 4
Earnings Surprise and Estimate Revision History NOTE THIS IS A NEWS-ONLY UPDATE; THE REST OF THIS REPORT HAS NOT BEEN UPDATED YET. Equity Research AGCO Page 5
OVERVIEW Established in 1990, AGCO Corporation is a leading manufacturer and distributor of agricultural equipment and related replacement parts. The company offers a full product line of farm equipment through a wide network of dealers and distributors in more than 140 countries across the world. AGCO Corporation s product line is categorized under five groups: tractors, replacement parts, combines, application equipment/sprayers, and other machinery. The tractor business sells compact tractors (below 40 horsepower) typically used on small farms and in specialty agricultural industries such as dairies, landscaping, and residential areas. Moreover, AGCO Corporation provides utility tractors (40-100 horsepower) and high horsepower tractors (100-500 horsepower) used in medium-scale and large-scale farms. The replacement parts business supplies replacement parts for products sold under each of its brand names. The unit sells combines under the AGCO Allis, Gleaner, Massey Ferguson, Fendt, Valtra, and Challenger brand names. Under the application equipment/sprayers group, AGCO provides self-propelled three-and-four-wheeled vehicles and related equipment for use in the application of liquid and dry fertilizers and crop protection chemicals. The company also manufactures other related equipment, including vehicles used for waste application. Finally, within the machinery group, the company sells hay tools and forage equipment, primarily under the Hesston, Massey Ferguson, Challenger, Fendt, and AGCO Allis brand names. AGCO Corp. also distributes an array of implements, planters and other equipment for its product lines. REASONS TO BUY AGCO remains committed to its strategic plans of continued investment in new product development, distribution enhancement and productivity improvement to drive growth and profitability. The company has made significant expenditures for engineering and applied research to improve the quality and performance of products, to develop new products and to comply with government safety and engine emissions regulations. The company recorded engineering and research expenditures of approximately $353.4 million in 2013, increasing 11.4% from $317 million in 2012. Growth in engineering expenses was primarily due to increased investment levels for new product development and costs to meet new engine emission standards in the U.S. and Europe. AGCO expects capital expenditures for 2014 to be in the range of approximately $350-$375 million, primarily to meet new engine emission requirements, support the development and enhancement of new and existing products and complete assembly factory in China. On Nov 5, AGCO and Appareo Systems agreed to enter into a joint venture that will develop technology for advanced machine control systems, innovative electromechanical devices and other systems. The proposed joint venture will build on the momentum of Fuse Technologies, AGCO s next generation approach to precision agriculture and machine management. Appareo will contribute to the initiative through R&D, intellectual property generation and advanced technology concept development. As the agricultural industry demands advanced technology, the partnership will provide breakthrough innovation to customers making them more profitable while supporting mixed fleet operations. The company is also committed to its plans of expanding in the Commonwealth of Independent States (CIS), China, and Africa, where it sees considerable growth potential. In September, AGCO entered into a 50-50 joint venture with Russian Machines to manufacture and distribute agricultural equipment and replacement parts in Russia. Further, it plans to invest in production facilities in China over the next 15 years. In addition, AGCO intends to grow its presence in Africa and has $100 million of investment in pipeline over the coming years. Equity Research AGCO Page 6
During the first nine-month period, ended Sep 30, 2014, AGCO entered into accelerated repurchase agreements (ASRs) with a financial institution to repurchase an aggregate of $290 million of shares of its common stock. AGCO has received around 5,389,119 shares during the nine months ended Sep 30, 2014 related to these ASRs. Additionally, during the third quarter of 2014, AGCO repurchased 1,049,376 shares for approximately $50.9 million. The company has approximately $190.5 million remaining under its previously authorized share repurchase program of $550 million. Further on Dec 15, AGCO has sanctioned a new share repurchase program worth up to $500 million, effective through Dec 31, 2016. This is in addition to its prior repurchase authorization. The new share repurchase program reflects AGCO's healthy cash flow generation and long-term strength. It is also in sync with the company's commitment to increase shareholder value through continuous investment in business. Further repurchases will also support the stock. GSI sales were up about 9% for the first nine months, ended Sep 30, 2014, compared with the same period in 2013. The major portion of the increase came from grain storage sales in Europe, North America and Brazil. AGCO expects GSI sales to be up approximately 10% for 2014 compared with 2013, with most of the growth occurring outside the U.S. The countercyclical nature of the protein production sector supports more stable earnings in GSI. In the long term, rise in population worldwide and change in diet are expected to create demand for additional grain storage and protein production capacity. REASONS TO SELL AGCO believes that the global industry demand will continue to soften in 2014 in comparison with 2013. The company anticipates declines across all major global agricultural markets, particularly in the row crop segment. AGCO projects earnings for 2014 in the range of $4.10 and $4.30 a share on the back of net sales in the range of $9.5 to $9.7 billion. The company also remains concerned that lower sales and production volumes will negatively impact gross margins. AGCO s North America segment reported a sales decline of 11% in the first nine-month period ended Sep 30, 2014, compared with the same period in 2013, due to lower sales of high-horsepower tractors, sprayers and implements, partially offset by sales growth in lower-horsepower tractors and grain storage. AGCO s forecast for higher-horsepower tractors, combines and sprayers have been reduced to reflect softening demand within the row crop farming sectors. Further, AGCO expects demand declines in the arable farming sector and more significant drops in the demand for higher-horsepower equipment in Western Europe. AGCO s worldwide order book for tractors was down about 15% as of Sep 30, 2014 compared with Sep 30, 2013. The company expects production volumes to be down 15% to 20% in the fourth quarter and about 15% in 2014 versus the prior-year period. AGCO s South America industry forecast reflects pressure from FINAME funding interruptions earlier in the year, a weaker sugar sector and lower demand in Argentina. Additionally, after several years of strong industry sales in Germany and France, the company is expecting a reduced demand in 2014 from 2013. The euro and Brazilian real both weakened during the third quarter, and currency translation negatively impacted net sales by about 0.7%. Currency is expected to reduce AGCO s fourth-quarter sales more significantly, resulting in an annual negative impact of about 2% in 2014. Equity Research AGCO Page 7
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of AGCO. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1120 companies covered: Outperform - 15.6%, Neutral - 76.9%, Underperform 6.8%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research AGCO Page 8