AGCO is currently trading at a price of $52.33 and is at a discount to the purchase price of both the Gurus.
I believe that the current stock level is an attractive buy opportunity for the long-term and this article discusses the reasons for being bullish on the company.
AGCO manufactures and distributes agricultural equipment and related replacement parts worldwide. This is immediately a positive as global food demand will remain high on increasing population and rising living standards in emerging economies like China and India. By 2030, food demand globally will increase by 60% as compared to 2012 and this calls for higher agriculture investment and greater productivity.
Being in the field of innovation and productive farming, AGCO is likely to gain from the fact that the crop yield in US is nearly four times higher than the rest of the world. This means that AGCO has a big opportunity to tap emerging markets and offer its innovative products to increase crop yields.
Innovation is the key to AGCO’s growth and the company is moving in the right direction by investing more on research and development. The company’s R&D expense has increased from $192 million in 2009 to $353 million in 2013. One of the outputs of the R&D has been the Fuse™ Technologies. This is a strategy to connect farm equipment into a seamless solution to optimize performance and efficiency.
Another major challenge in the agriculture industry is the percentage of grain harvest lost. The percentage is 4% in North America, 10% in Latin America, 12% in industrialized Asia and 14% in North Africa, West & Central Asia. Again, this is a big revenue opportunity for AGCO where the company offers solutions for storage to curb grain losses and enhance protein production businesses through its GSI platform.
The company’s EPS growth in the last few years shows the potential in the industry with the company’s EPS increasing from $2.32 in 2010 to $6.01 in 2013. Further, the company’s sales diversification by geography still offers huge growth upside.
As of 2013, only 19% of the company’s revenue came from South America and 5% of the revenue from Asia/Pacific. Both these geographies have strong growth potential and as AGCO makes inroads in these markets, the company’s revenue and EPS growth will remain robust.
From a shareholders perspective, another positive is the fact that AGCO has become a dividend paying company since 2013. For FY13, the company paid its first dividend of $0.4 per share. It is entirely likely that the company’s dividends will keep increasing with overall revenue and cash flow growth. The company’s operating cash flow was $797 million in FY13 and with a capital expenditure of $391.8 million; the free cash flow was $405 million. Therefore, if this growth trend continues, FCF and dividends will continue to increase as well.
Even looking at the balance sheet health, AGCO has a sound balance sheet with a cash position of $1.0 billion, a net debt position of just $200 million and a debt to capitalization of 24%. This gives AGCO high financial flexibility and ensures that the company can grow at a robust pace without worrying much on the funding.
Guru Focus rates AGCO 8 out of 10 on financial strength as well as on profitability & growth and I believe that these ratings point to very strong fundamentals and growth prospects.
In terms of valuation, AGCO trades at an EV/EBITDA of 5.24 and this is very cheap as compared to an EV/EBITDA of 10.0 for Deere & Company (NYSE:DE). I certainly consider Deere & Company also as a company with strong fundamentals and good prospects. However, on a relative basis, the returns can be higher for AGCO from current valuations. My findings are backed by Peter Lynch Earnings Line, which also points to undervaluation for AGCO.
AGCO is therefore a great value buy at current levels and the company’s growth prospects are promising. I do believe that AGCO will continue to increase its presence in Asia and Latin American and this will keep the growth momentum going. The company’s dividend growth is also something to watch out for in the future.
Guru Focus rates (Business Predictability Rank) AGCO at a healthy 4-star.
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