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AGCO: Undervalued and On Your List

David Chulak

David Chulak

29 followers
When a famous investing guru such as Martin Whitman (Trades, Portfolio), founder of Third Avenue Value Fund makes any move, it behooves the smartest of investors to watch where this great investor is headed. Whitman is not only a value investor emphasizing a buy and hold technique, he specializes in distressed companies. Every investor should include a copy of Whitman’s book entitled, “Distress Investing, Principles and Techniques”. You will not be disappointed.

Recently, Whitman opened a new position into AGCO Corp. (AGCO). AGCO Corp., is an agricultural company that competes directly with Deere (DE), Komatsu (KMTUY), Caterpillar (CAT), Joy Global (JOY), Kubota Corp. (KUBTF), Terex Corp. (TEX) and several others.

AGCO is an international company with sales created in the U.S., which accounts for approximately 25% of their business. They also are in the European market (their largest position), along with Latin America and Asia.

Admittedly, not a huge position, he opened his purchase with 253,642 shares, just behind First Pacific Advisors (Trades, Portfolio) 254,000 shares and Jim Simons (Trades, Portfolio) new position with 185,800 shares. Notably, gurus are beginning to recognize a stock and it’s worth taking note. Others that hold positions are Jeremy Grantham (Trades, Portfolio), Steve Cohen, Paul Tudor Jones (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), David Dreman (Trades, Portfolio) and Chuck Royce (Trades, Portfolio). All good company to invest with.

One thing that jumps of the page are the metrics which scream that this stock is “cheap”.

Price to Earnings: 9.8

Price to Book: 1.4

Price to Sales: 0.5

Price to Cash Flow: 7.3

Piotroski Score (F-Score) of 7

In addition, the stock has a very modest dividend yield of 0.7 with a payout ratio of merely 11%, leaving much room for expansion.

The stock, aside from purchases by these mentioned gurus is experiencing inside trading since the beginning of 2014.



Often neglected by many is Benjamin Graham’s defensive stock selection. If remembered, Graham’s strategy for defensive investors included:

  1. The sector not being in either financial or technology.
  2. A minimum or adequate sized company of what would be approximately $350 million.
  3. A current ration of at least 2 or greater.
  4. Long term debt, in relation to the company’s net current assets should not be exceeded. That is, the long term debt should not exceed the net current assets or as Graham would explain current assets minus current liabilities.
  5. Graham also had a conservative earnings growth requirement of at least 30% over a 10 year period. In addition, he did not want to see any negative earnings within the last five year period.
  6. Graham also wanted a reasonable PE ratio of 15 which defined defense to him.
  7. Finally, the PB ratio must also be reasonable, preferably not greater than 1.5, but the final test was that the PB multiplied by the PE should never exceed 22.
AGCO Corp., stacks up well with the Graham defensive stock selection, only falling short with the current ratio which is presently at 1.6. They also have a quick ratio or acid test ratio of 0.7. Historically, however; this fits in with the company’s personality as shown below:



This stock also falls into the Pete Lynch style of stock selection as a “fast grower”, and nearly passes in every qualification that Lynch portrays. Further, note that the Peter Lynch Fair Value number hovers at approximately $145, distinctively above its present value of $56.90 per share, leaving the investor with a margin of safety greater than 50%.

While that valuation seems rather steep, a look at the discounted cash flow still indicates a reasonable and satisfying margin of safety of 36% with a price of $88.65



Though AGCO is considerably behind Deere (DE) in U.S. market share, they have an advantage in other markets, including Europe, South America and Russia. In fact, where so much agricultural growth is coming from in South America, AGCO holds nearly 50% of the market and is a leader in Europe. Between Russia and South America (mostly Brazil), the company has a catalyst for high growth and solid or good returns. The company continues to push into other markets.



Noticeably, their Return on Invested Capital (ROIC) and Return on Assets (ROA) metrics are showing a definite improvement in what has been a most difficult market for agricultural based stocks.



Still, the sector has much weakness, however; with these well-known gurus jumping into AGCO Corp., this may indicate that the time is either upon us or that the stock should be under our radar screens. As always, this is a very cyclical market and must be watch closely. With that said, the margin of safety is tempting and worthy of consideration.

Disclosure: None

About the author:

David Chulak
David Chulak is a private investor that uses a value approach to investing in the styles of Graham & Dodd and Warren Buffet. Looks for that margin of safety in an effort to preserve capital and attempts to guard against short term market fluctuations by having clear rules laid down in advance for selling an equity. Likes to visit the company's where his investments are in order to understand the business better.

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