Agco Could Face Challenges

Farm equipment is selling for half off at auction

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In the last few days, I have written articles explaining the risks that agricultural equipment manufacturers John Deere (DE, Financial) and CHN Industrial (CNHI, Financial) face. Today, I am going to add Agco (AGCO, Financial) to that list.

To summarize the previous two articles, I found the results of two Ritchie Brothers auctions in St. Louis and Kansas City. In those two auctions, there were several slightly used, high-end tractors and combines that were selling for 50 cents on the dollar. In some cases, even less than half off. This does not portend good things for the ag manufacturers.

Agriculture has been facing issues for the last few years due to low grain prices. These grain prices have been affected by the weather that we have experienced for the last few years. For instance, 2012 was a terrible year because of the extreme heat and droughts.

Agco is different from Deere and CNH in that almost all of Agco’s equipment is farm related. According to the Annual Report, 57% of sales were tractors, 16% parts, 10% grain storage, 4% combines, 5% application equipment (pesticide sprayers) and 6% other. Agco derives 26% of sales in North America, 13% South America, 5% Asia and 56% Europe/Middle East. I am not going to say that Agco is 100% ag, but it is darn close. Deere, on the other hand, sells lawn, forestry and construction equipment. CNH heavy equipment, buses and transmissions.

The strength that Agco has over CNH and Deere is that Agco does not hold the huge amounts of debt and equipment receivables that the other two do. As of the latest quarter, Agco held $325 million in cash and $946 million in accounts receivables. It only had $741 million in accounts payable and $1.472 billion in debt. For the first six months of 2016, sales dropped 6.1% from $3.7719 billion to $3.5549 billion. That is not a huge drop.

At a recent Ritchie Brothers auction in Kansas City, an Agco Challenger CH560CC combine with only 356 hours sold for $112,500. My simplistic rule of thumb to compare hours on a tractor to mileage on a used car goes like this: 1,000 hours is equal to 20,000 miles on a car. So the combine above has the equivalence of about 7,120 miles. You can buy new cars that are demos with that many miles.

My guess is that the same combine brand new would be going for between $300,000 and $400,000. If you look at the two articles on CNH and Deere, you will see better pricing details for new equipment as you can find the information on their web sites.

So why would any farmer want to buy new? My concerns for Deere and Case are that farmers will simply let the financing divisions repo the equipment and buy back at half off. The two have huge amounts of debt. Agco is fortunate in that it does not. However, the stock is almost $50 a share and too high priced. We sold stock recently in the three manufacturers, but we still hold Agco debt. My advice is to hold off on these three.

Disclosure: We own Agco debt.

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