Agco (AGCO, Financial) is a U.S.-based tractor manufacturer that is down with grain prices. Being out of favor, it is a darling of the value investing community. What will probably change that is a year of inclement weather, which will raise grain prices.
Agco has 82.47 million shares and trades at a market cap of $4 billion. The dividend is 52 cents and dividend yield 1%. Trailing earnings per share are $2.81 and the price-earnings ratio is 17.
Its sales correlate to grain prices and have been cyclical. Revenues were $8.7 billion in 2011, $9.97 billion in 2012, $10.8 billion in 2013, $9.7 billion in 2014 and $7.5 billion in 2015. EPS was $6.10 in 2011 and $3.06 in 2015.
The asset side of the balance sheet shows: $248 million in cash, $943 million in accounts receivable and $1.7 billion in inventories. The liability side: $321 million in short-term debt, $674 million in accounts payable and $1.258 billion in debt.
Agco no longer sells its eponymous orange tractor. Its brands now include: Massey Ferguson, Fendt, Challenger and Valtra. Agco also has a grain storage division named GSI and bought a grain handler in Denmark named Cimbria for $340 million. The company makes 16% from parts, 4% from storage and the rest from tractors and other ag machinery.
Fifty-one percent of Agco's sales are generated in Europe, 26% in North America, 13% in South America and 10% in the rest of the world. As you might expect, South American sales have been beaten up.
Research reports from neither Credit Suisse nor Standard and Poor's are sanguine on Agco’s outlook. EPS and revenue estimates are hardly much different than what the company produced in 2016. The feeling is that the analysts really don’t know because they have no idea where grain prices are going to be.
Agco’s two main competitors, John Deere (DE, Financial) and Case, are in the same boat. Their stocks are down too. Agco differentiates itself in that it is a pure play ag company. John Deere is also in construction, lawn and garden, forestry and several other industries. Case is in buses, construction and transmissions. One would think that Agco would respond more favorably to grain prices — but that might not be the case.
So what is going to drive this stock? Grain prices. Corn was $8 a bushel in 2012 and is $3.37 now. Soybeans were almost $18 back then and are a little over $10 now. The good news is that prices are off the bottoms set earlier this year. When the weather was questionable in the spring, prices rose sharply, but they have since calmed down.
Every ag person will point out the exploding global population and how those people need to be fed. This is no doubt true — unfortunately, grains are correlated to most other commodities. What will probably need to happen for their price to rise is for the U.S. to have an unseasonably rainy or dry year.
Gurus that hold shares of Agco include: Third Avenue, Tweedy Browne (Trades, Portfolio), and First Pacific Advisors (Trades, Portfolio). All great value funds. What do these great funds see? That Agco is down because grain prices are down. When we have a year of inclement weather, grains will probably rise — and Agco’s stock along with it.
Osborne Global owns stock in Agco, Case and John Deere.
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