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Has AGCO Reached Its Zenith?

March 10, 2014 | About:

Brand visibility and innovation are two key characteristics for any long-term business strategy. Both qualities are foundational features to construct a strong brand, and AGCO (AGCO) is showing that is aware of such requirements. Through the Discover AGCO, the firm has drawn over 7,000 people to its own show at National Exhibition Centre in Birmingham. There, it displayed products for the leading brands Challenger, Fendt, Massey Ferguson, Valtra, Fella and for the first time, GSI grain storage and handling equipment. David Sleath, AGCO Director Sales UK and Ireland, commenting on the even said, “The five core brands, along with Fella and our support services, allow us to put on an event like this, showing that while the separate brands are all very different and have their own identities, they also all have the strong central support of AGCO.” But the business strategy for the agricultural giant is more than a single show, so let us see what else management considers key for its long-term growth.

Market Expansion and New Products

Since 2009, overall performance for AGCO has improved year-over-year. Operating margin, revenues, net income and cash flow increments allowed the firm to take-in debt without putting the current business model at risk. Moreover, debt level has been considerably reduced during the last two years. Most importantly for shareholders, earnings per share have rose 32% during FY13Q3.

In such context, management has updated AGCO’s plan for the African continent. To the Global Learning Center and adjacent Future Farm in Zambia, the company formed a new joint venture with the Algerian government for the manufacture of tractors for the local domestic market. Also, it has opened a state-of-the-art African Master Parts Distribution Center in Johannesburg. All that is a complement to the second annual Africa Summit held in later 2013.

Additional plans for expansion have focused on Russia and China. AGCO’s management entered into a 50-50 joint venture with Russian Machines to manufacture and distribute agricultural equipment and replacement parts in Russia. At the same time, the firm made public a plan to invest in production facilities in China over the next 15 years.

At the same time, AGCO has presented FuseTM Technologies: a new global corporate initiative that encompasses all aspects of AGCO’s technology offerings. “These ideas of connectivity and deeper integration are at the core of Fuse Technologies,” said Matt Rushing, Vice President, Product Management, Advanced Technology Solutions and EFG. The impact of such technologies not only improve overall yield for farmers, but entices brand loyalty in the long-term through system compatibility.

Geopolitics and Market Trends

Market expansion does not come cheap, and one of the greatest risks for a global operation is geopolitics. The world has seen many wide protests and government overthrows. The Arab Spring is especially relevant for AGCO’s future plans in Africa. And the settling of the current upheavals in Egypt, Sudan and Congo is a key to stable market expansion. Also, the current protests in Ukraine can affect operations in Eastern Europe; compounding current loses in Western Europe.

The greater demand for technology agriculture-specific products has placed additional pressure on AGCO to increase engineering expenditures. Additionally, environmental regulation has reduced prospects for margin improvements as Tier 4 emission regulation comes into place. Last, sales in North America have reached its peak and FINAME borrowing cost increases are expected to pressure earnings in the short-term.

Closing Thought

Trading at 9 times its trailing earnings, AGCO’s stock carries a 15% discount to the industry average. Gurus have not registered important transactions during 2014, but made important movements through the second half of 2013 that are already paying returns. Additionally, stock price has dropped considerably during the last quarter of 2013. I believe that geopolitical developments will quiet down during 2014, and the low stock price with increasing dividends, offer a good opportunity for a long-term investment.

Disclosure: Vanina Egea holds no position in any of the mentioned stocks.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


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