Third Avenue Management Comments on AGCO Corp

Fund Management initiated a position in the common stock of AGCO Corp. (AGCO) ("AGCO") during the quarter. AGCO is a pure-play agricultural company dedicated to farm machinery, grain storage solutions and protein production equipment. It is a global company with sales generated across the following geographies: 23% U.S., 53% Europe, 23% Latin America and 1% Asia pacific. It maintains an investment grade balance sheet, is highly cash generative, and has been consistently profitable. Despite these appealing characteristics, the current valuation is depressed due to short-term concerns.

Agricultural spending drives AGCO's top-line and it is primarily driven by farm income. Farm income has grown rapidly in the U.S. over the past five years and many are projecting that spending growth will slow down or decline in the near term. This is putting pressure on agricultural- related companies like AGCO (See AGCO's valuation history below). AGCO 10 -year Valuation History Source: Capital IQ Note: Hi: 8.2X, low: 2.0X, average: 7.3X although we agree that agricultural spending will likely be challenged in the near term, there are mitigating factors to combat slowing end-market activity. First, AGCO's exposure to North America is only 23%, which trails peers by wide margins. Over half of AGCO's sales are in Europe. There seems to be less risk in Europe, as farm incomes have been more stable when compared to U.S. farm incomes. Second, AGCO's operating margins are lower (8%) than peers and management is focused on improving them to double digit rates. Management's potential to improve margins provides a cushion to sluggish sales. Finally, management has responded to the attractive valuation by implementing a $500 million stock buyback program (roughly 10% of current market capitalization) and has been aggressively purchasing shares at current prices.

What we find most interesting is how the short-term concerns seem to be overshadowing attractive long-term agricultural trends. as economies develop, per capita protein demand tends to grow. Productivity in North America exceeds other geographies as well. Higher protein demand and the potential for productivity improvement outside the U.S. should provide tailwinds for agricultural spending even if U.S. farm incomes are challenged. AGCO is well positioned to take advantage. in addition, outside the U.S. and Europe, between 10% to 15% of annual grain harvest is wasted due to insufficient storage capacity. AGCO's grain storage products are a very important part of the solution for this fundamental problem. With AGCO's strong market positions in areas such as Latin America, it should have ample ability to grow sales over the long haul.

Although not a central part of our thesis, given AGCO's healthy market position outside the lucrative U.S. markets, it could be an appealing target for larger competitors who are interested in expanding its footprint outside the U.S.

From Martin Whitman (Trades, Portfolio)'s 2Q 2014 Shareholder Letters.