South America Financial News

AGCO: Strong Development Potential And Low Valuation (NYSE:AGCO)

Agricultural tractor FENDT 930 Vario with seed wagon HORSCH on cultivating field for sowing seeds

Maksim Safaniuk/iStock Editorial through Getty Photographs

Funding Thesis

AGCO Company’s (NYSE:AGCO) manufacturing and gross sales have been impacted as a result of provide chain constraints and decrease manufacturing days in Q2 FY22 as a result of cyberattack. This, coupled with robust orders, led to an elevated order backlog. As the availability chain constraints ease in 2H FY22, the corporate ought to have the ability to convert its order backlog into income at an elevated tempo. AGCO additionally plans to extend its manufacturing hours within the second half of FY22 to compensate for the misplaced time in Q2 FY22, supporting the gross sales progress. The corporate has been implementing pricing actions throughout its enterprise portfolio, which ought to assist the corporate’s gross sales and margin progress within the second half. Whereas gentle commodity costs have been declining since June, they’re already close to their pre-Russia-Ukraine battle ranges and we do not see a lot draw back from these ranges. Additional, the worldwide meals scarcity disaster ought to assist restrict any additional decline. The corporate is increasing its Fendt enterprise in different areas and making acquisitions to develop the Precision Ag enterprise to enhance its gross sales and margins beneath its Farmers-First technique, launched in March 2022. Valuations seem low cost and the risk-reward favorable. Therefore, I’ve a purchase score on the inventory.

AGCO’s Q2 FY22 Earnings

AGCO lately reported combined Q2 FY22 monetary outcomes, with lower-than-expected gross sales and better-than-expected earnings. The web gross sales within the quarter was up 2.3% Y/Y at $2.9 bn (vs. the consensus estimate of $3.02 bn). The EPS within the quarter declined 17.4% Y/Y to $2.38 (vs. the consensus estimate of $2.11). The gross sales progress was primarily the results of pricing (~9%), offsetting the influence of the cyberattack that resulted in decrease manufacturing gross sales, significantly in North America and Europe. The adjusted working margin declined 120 bps Y/Y and remained fixed sequentially, largely pushed by the impact of decrease manufacturing and price inefficiencies as a result of cyberattack, provide chain challenges, and better working bills as a % of income.

Close to-term Development Prospects

The web gross sales of the corporate improved by 2.3% Y/Y or 10% Y/Y excluding the influence of damaging foreign money translation. Web gross sales within the North America section elevated 0.7% Y/Y or 1.4% Y/Y excluding the influence of damaging foreign money translation. The rise was primarily as a result of pricing actions taken by the corporate to mitigate inflationary price pressures, partially offset by decrease gross sales of combines and sprayers. The web gross sales within the South America section grew 77% Y/Y or 86.6% Y/Y excluding the influence of damaging foreign money translation. The gross sales have been pushed by the pricing actions in addition to quantity and blend results, with elevated gross sales of excessive horsepower and midsized tractors in addition to sprayers. The web gross sales within the Asia Pacific/Africa section declined 5.5% Y/Y and have been up 1.6% Y/Y, excluding the influence of damaging foreign money translation. Greater gross sales in Japan and Australia have been partially offset by decrease gross sales in China as a result of COVID-related lockdowns. The Europe/Center East section’s internet gross sales declined 10.2% Y/Y and have been up 3% Y/Y excluding the influence of damaging foreign money translation. The gross sales progress excluding foreign money influence was primarily because of pricing, partially offset by decrease volumes as a result of impact of decrease manufacturing and provide chain challenges.

On the finish of Q2 FY22, the order board (backlog) of AGCO was at an elevated degree with the next mixture of the retail portion. The order board within the quarter was up 30% Y/Y in Europe and the corporate is getting a powerful order fee regardless of the uncertainty available in the market. Orders for tractors and combines have been considerably increased in North America and Europe and have been down modestly within the South America area Y/Y within the final quarter. The corporate is shortening its order board in Brazil to three months to have extra pricing flexibility within the area as the extent of inflation within the South American area is increased than in different elements of the world.

Within the first half of FY22, the business’s retail gross sales have been negatively impacted because of provide chain constraints. The gross sales in North America and the Western European area have been damaging. Nevertheless, the gross sales in South America have been constructive, with elevated gross sales in Brazil and Argentina. Robust crop manufacturing ranges and commodity costs are supporting the financial situations within the area, with farmers persevering with to exchange their ageing fleet.

In Might 2022, the corporate’s operations have been impacted because of a cyberattack, because of which AGCO misplaced roughly 1 to 2 weeks of its manufacturing. Nevertheless, the corporate has efficiently restored its techniques. The influence brought about the second quarter manufacturing hours to be down about 8% in comparison with the earlier yr’s identical quarter, leading to decrease gross sales in Q2 FY22. The corporate plans to get well the misplaced manufacturing hours by growing manufacturing in each the third and fourth quarters by roughly 5% to 7% Y/Y. The manufacturing charges in July have been strong and, wanting ahead, the corporate ought to proceed delivering increased manufacturing hours.

AGCO's revenue distribution

AGCO’s income distribution (Firm information, GS Analytics Analysis)

The farmer sentiment index has been dropping since 2021 and lately hit the bottom degree since October 2016. The weaker farmer sentiment is principally as a result of rising prices and uncertainty associated to the financial system. Additional, the battle in Ukraine and the brand new laws within the European area impacted the farmers’ sentiments negatively. The brand new regulation focuses on attaining a inexperienced and sustainable system within the agricultural business. Whereas these laws are negatively impacting the farmer sentiments they need to truly be constructive for AGCO as the brand new emission laws ought to give AGCO a possibility to promote its sustainable and environment friendly merchandise to farmers in Europe. Regardless of the declining farmer sentiment index, the corporate has been witnessing robust demand for its merchandise as farm revenue stays robust.

Trying ahead, the gentle commodity costs have been declining since June 2022, which ought to begin affecting the farm revenue and this correction is already getting mirrored within the present low valuations. Nevertheless, the excellent news is I do not see a lot draw back from the present ranges as the worldwide meals scarcity brought on by the Russia-Ukraine battle, the COVID pandemic, and the climatic adjustments throughout numerous continents. Local weather change has resulted in droughts, heatwaves, and wildfire conditions within the European Union, North America, and a number of other different continents. Because of the extraordinarily sizzling and dry situations in a number of areas of Europe, the crop yield for EU summer time crops in FY22 has been lowered by 8% to 9%. This could influence the availability of grains available in the market for a while and may restrict the additional decline in gentle commodity costs.

As the availability chain constraint within the second half of 2022 improves, the corporate ought to have the ability to convert most of its order board into income, which ought to enhance the gross sales progress in FY22. The corporate can be growing its manufacturing hours in 2H FY22, which ought to be incremental to its gross sales progress. Moreover, the corporate is anticipating 10% of gross sales from pricing actions and is anticipating the damaging foreign money translation to negatively influence gross sales by 7%. The corporate is anticipating gross sales progress within the vary of $12.4 bn to $12.6 bn (12% Y/Y upside on the midpoint) for the total yr FY22.

Lengthy-Time period Development Prospects

AGCO is making vital capital investments within the improvement of recent options to assist its Farmer-first technique, which it introduced on March analyst day. The important thing component of this technique is to deal with optimizing present companies and accelerating precision agriculture and digital capabilities to supply worthwhile progress. This ought to be achieved by capitalizing on the expansion companies, delivering operational enhancements, and capturing rising developments within the business by figuring out a small variety of new competencies inside the firm. The corporate’s rising enterprise contains Fendt full-line, Precision Planting, North America Massive Ag, and International elements & companies. Rising the Fendt enterprise has two items to it. First is that, over the previous couple of years, AGCO has stuffed its Fendt product line with completely different merchandise by acquisitions and by creating its merchandise. The corporate plans to broaden different product traces by leveraging the robust presence of Fendt’s tractor enterprise. The second piece is that the corporate desires to take this portfolio of Fendt merchandise and prolong it into different areas of the world. Observe that Fendt is a really robust enterprise in Europe. The corporate has already began promoting a few of its merchandise within the North America and South America areas. The Fendt model gross sales in 1H FY22 elevated over 20% Y/Y and are anticipated to additional enhance in 2H FY22 given the present manufacturing plan. The Fendt and Challenger gross sales in North and South America are anticipated to double in FY22 in comparison with that in FY20 and the corporate is concentrating on to double this progress additional over the following 5 to seven years.

In 2017, AGCO purchased Precision Planting Firm, a number one producer of high-tech planting gear. Over time, AGCO has nearly doubled the dimensions of Precision Planting firm by providing numerous planter merchandise equivalent to Fendt’s Momentum planter. The expansion trajectory on this enterprise comes from a number of methods, equivalent to providing merchandise by the retrofit channel or the OEM channel. The retrofit channel helps farmers convert their present machines into superior machines by putting in retrofit kits provided by AGCO. This reduces the capital funding required to purchase a wholly new OEM machine. The Precision Planting and Fuse Related Providers expertise teams contribute nearly 50-50 to the entire income generated from the Precision Ag enterprise. The Precision Planting enterprise fuels the expansion of the retrofit enterprise, whereas the Fuse serves AGCO’s gear manufacturers from an OEM standpoint. Fuse offers OEM options for AGCO gear equivalent to telemetry, steering, subject mapping, and different precision agriculture capabilities, making AGCO machines smarter and extra productive for the farmer.

To develop the Precision Ag enterprise, the corporate has made nearly 5 acquisitions within the final 18 months, with JCA Industries being the newest one. JCA Industries makes a speciality of digital techniques and software program developments to automate and management agricultural gear. If we have a look at AGCO’s acquisitions, the corporate has not been buying commercialized companies; as an alternative, it has been buying firms that can speed up its product launch into the market, equivalent to firms specializing in imaginative and prescient expertise, autonomy capabilities, or sensor expertise. The corporate lately introduced new merchandise for its retrofit sprayers, that are anticipated to be commercialized by 2024. The corporate plans to realize related success to that of the Planters retrofit enterprise.

Within the final quarter, the corporate’s Precision Planting enterprise was impacted by the availability chain, significantly round semiconductor chips. AGCO has been working with its engineers to vary some design parameters or reengineer its gear to make the most of one other chip that may be accessible. The corporate is attempting each means doable to get its product out of the manufacturing unit. The order board throughout the enterprise is powerful, which ought to assist the gross sales progress as the availability chain constraints ease within the second half of FY22. The income generated from the Precision Ag enterprise was ~$540 mn in FY21 and the corporate is anticipating it to extend by 20% to 25% Y/Y in FY22. Given the CAGR of over 20% within the Precision Ag enterprise, the corporate has raised its goal from $800 mn to $900 million in income technology from this enterprise by 2025.

Margins

AGCO’s margin has improved from Q1 FY18 to Q1 FY22 by 620 bps. Over the previous couple of years, the corporate has targeted on price discount and enhancing product positioning when it comes to product combine, which helped drive margins up. In Q2 FY22, the adjusted working margin was affected by the inflationary price pressures because the pricing actions weren’t in a position to offset the influence on a margin foundation. The North America section margin dropped 720 bps Y/Y to six.9% because of decrease gross sales quantity and manufacturing inefficiencies, coupled with the weaker combine and better working bills. Nevertheless, the South America section margin improved 820 bps Y/Y to 16.5% because of vital will increase in finish market demand together with robust pricing and a wholesome gross sales combine. The Europe section margin declined 130 bps Y/Y to 11% because of decrease manufacturing and price inefficiencies. The Asia Pacific/Africa section margin improved 260 bps Y/Y to 14.1% because of an improved gross sales combine.

AGCO's adjusted operating margin

AGCO’s adjusted working margin (Firm information, GS Analytics Analysis)

South America segment margin

South America section margin (Firm information, GS Analytics Analysis)

Because of a product line transition and a scarcity of obtainable merchandise within the South American market, the corporate skilled losses in FY18 and FY19, which resulted in a decline within the firm’s total margin. Nevertheless, with time, the corporate managed to enhance its margin within the area, which is now at ~12%. The corporate was stronger within the small gear enterprise within the area however is now seeing some good momentum within the excessive horsepower gear that serves huge farms. The excessive horsepower gear is often the next margin product and improves the combo of product choices. The corporate additionally made adjustments to its distribution community and introduced Fendt merchandise and the Momentum planter to the area. The corporate was forward of the inflationary pressures in Brazil by growing costs, which helped to enhance the margins. The corporate expects this to proceed for the remainder of the yr.

Past this uncommon inflationary interval, the corporate is concentrated on enhancing its margins by rising in high-margin areas, lowering prices, and enhancing efficiencies. The corporate’s plan to take Fendt-branded merchandise globally might be accretive to its margin as Fendt gives high-margin merchandise, and with the growth in North America and South America, the corporate has good progress alternatives. Precision Planting offers numerous revolutionary precision agriculture expertise by a retrofit channel, and that’s driving good margin enchancment. The corporate has additionally improved its fill charges, which is how effectively stocked the corporate is with its elements and the consistency of elements availability. This could assist enhance the corporate’s margin because it is likely one of the highest. margin companies. This could drive the corporate’s adjusted working margin effectively past 10%.

Working margins are anticipated to be increased within the third quarter of FY22 with continued robust market situations and pricing offsetting the results of fabric price inflation. The corporate can be witnessing progress in its excessive horsepower gear, which has excessive margin profiles, supporting the margin progress prospects in 2H FY22. The working margins in FY22 are anticipated to enhance Y/Y because of increased gross sales, favorable pricing internet of fabric prices, and improved manufacturing unit productiveness, partially offset by investments and inflationary price pressures.

Valuation & Conclusion

AGCO is at present buying and selling at 8.97x FY22 consensus EPS estimate of $11.84 and eight.36x FY23 consensus EPS estimate of $12.70, which is at a reduction to its five-year common ahead P/E 16.25x. The corporate has a powerful order board, and with the pricing actions happening together with elevated manufacturing hours, AGCO ought to have the ability to enhance its income in FY22. AGCO’s technique to deal with optimizing present companies and accelerating precision agriculture and digital capabilities to supply worthwhile progress ought to be helpful in the long run. The corporate is increasing its Fendt enterprise in different areas and making acquisitions to develop the Precision Ag enterprise to enhance gross sales. Each companies are accretive to margins. As the availability chain constraints ease, I consider the corporate ought to have the ability to enhance its gross sales, and with pricing actions happening, it ought to have the ability to enhance its margins. Therefore, I’ve a purchase score on the inventory.

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