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Vanin Aegea
Vanin Aegea
Articles (218)  | Author's Website |

Third Places Hold Good Prospects

October 17, 2013 | About:

Even though the companies analyzed here are not market leaders, they seem to hold some important potential. AGCO (AGCO) and Joy Global (NYSE:JOY) are both the third largest pure-play companies in the agriculture and mining equipment industries, correspondingly. Gurus have made heavy investments in those firms, and their holdings continue to increase. The difference is that AGCO’s largest guru stockholder has achieved that position through a single, recent stock purchase.

Third in Agricultural Equipment

During the third quarter, AGCO experienced overall performance improvements, continuing the trend seen in the previous quarter. Growth, management explained, was driven by higher sales in South America and the Asia-Pacific region. The performance has consequentially continued to feed plans for international expansion. However, alarm has been ignited by the company’s prospects in Western Europe.

With respect to international expansion, AGCO’s business strategy points to the Commonwealth of Independent States, China, and Africa. The company intends on taking the opportunity offered by out of date equipment, in order to boost efficiency, while at the same time improving farmer’s profits. Besides the known plans for plant opening in China, the company began production in Africa during December of last year. Management will continue to bet on the African continent with the hope of absorbing market synergies, originated by a rapid growing population and a rising need for equipment to boost production.

AGCO has also focused on technology innovation. Concerning GSI, the company’s grain storage manufacturer, “Technology continues to change farming practices. At GSI we are integrating technology into our product designs to provide industry leading reliability, efficiency, and ease of use” Jeff Feldkamp, GSI’s Director of Engineering – North America said. In line, the company introduced FuseTM Technologies, a new global corporate initiative that encompasses all aspects of AGCO’s technology offerings. The end of FuseTM is to integrate all farm assets, offer global access and support, and connect with preferred service providers.

Financially, AGCO is moderate to strong with a declining debt and rising revenue. Currently trading at 11.6 times its trailing earnings, the stock carries a very small premium to the industry average. Five gurus have incremented their holdings in the company, but Jim Chanos made a statement when buying for the first time and turning into the largest guru investing in the firm. No guru has reduced its stake, and that feeds my optimism about the company’s future prospects. Last, the business strategy implemented has fared very well, and helped the firm to offset low results in North America.

Third in Mining Equipment

The mining industry is experiencing a slowdown in activity due to a decline in commodity prices, and Joy Global is no exception to this market context. Nonetheless, the company has improved performance in its second quarter, but overall performance continues to lag behind 2012. Another weak point is a declining order booking and backlog, aggravated by a weak European and slower Chinese economy. On the upside, the aftermarket segment represents 52% of revenue, and has helped to ease the impact from declining sales of original equipment.

Joy Global’s focus on value-added aftermarket services has given the firm an important edge in the industry. The strategy has fared well and increased market share thanks to equipment reliability improvements, enhancing customer satisfaction, and developing long-lasting relationships. In turn, customers return to the firm’s dealerships for aftermarket parts. The strategy has fared well for the company as it is able to ease original equipment sales cycles, and to absorb the benefits of a segment with high margins. Also, the swift implementation of cost optimization policies and production volume realignment is evidence of capable management.

International expansion is also an important part of Joy Global’s business strategy. The most telling evidence in this sense are, the acquisition of an important stake in the International Mining Machinery Holdings Limited, and full acquisition of LeTourneau Technologies Inc. The first transaction will increase exposure to the Chinese market, while at the same time improve design and manufacturing techniques for longwall mining equipment. The second transaction will transfer to the firm an important market advantage in the large sized wheel loaders.

Financially, Joy Global is moderate because of high debt contracted through recent acquisitions. Nonetheless, the acquisitions have had a positive effect over future prospects, and several gurus have acted upon the signal. The three largest gurus holding a position in the company have increased their position in excess of 100%. I share their optimism because the firm has a strong cash flow and a low debt-to-equity when compared with the industry average.

Third Is the Charm

AGCO and Joy Global are not industry leaders; nonetheless, their market positioning has not limited their prospects. Should I have to choose one over the other, AGCO would be my pick. Despite lower operating margins, AGCO operates in an industry that continues to experience stable growth. The introduction of new seed traits and growing world population configure a favorable macro context for agriculture equipment.

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

About the author:

Vanin Aegea
A fundamental analyst at Lone Tree Analytics

Visit Vanin Aegea's Website

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