EUR 850.00 For Business Accounts Only

Morningstar | AGCO Updated Forecasts and Estimates from 13 Nov 2018

Third-quarter results for no-moat Agco featured double-digit sales growth and operating margin expansion. Every region reported sales growth, including South America, which had previously reported two quarters of sequential decline. Global crop production has been up for 2018, which has provided tailwinds to Agco. North America’s record harvest was partially offset by lower output in parts of Europe, Argentina, and Australia. Considering this most recent information, we are raising our fair value estimate modestly to $78 from $75.

Total revenue grew 11% year over year to $2.2 billion, which featured 13% sales growth in North America and 15% sales growth in Europe-Middle East. In North America, farmers who have delayed buying equipment for four to five years from the last peak are now resuming their purchases. Offsetting this pent-up demand is negative sentiment over current trade issues. Demand from row crop farmers was especially strong after years of weaker demand. In Latin America, higher sales in Brazil were offset by weak sales in Argentina due to the peso devaluation and lower crop production due to dry weather.

Increased use of technology in product offerings was cited as a reason for average sales price increases. Additionally, more sophisticated features and related technology is spurring sales as farmers seek new capabilities. Agco’s precision planting technology was cited as a particularly strong motivating factor for greater sales volume.

For the quarter, operating margins expanded roughly 10 basis points to 5.0%, and we believe higher demand in South America throughout the remainder of the year will boost full-year margins above 5%. Net income increased slightly to $71 million from $61 million primarily due to higher sales and slightly lower restructuring expenses.

Robust global demand and improving crop conditions should provide a short-term tailwind to Agco, but our long-term forecasts remain mostly unchanged. Management expects 2018 revenue to approach $9.3 billion, which represents a 12% increase over last year's total, and we forecast a similar number before demand tapers off to our projection of normalized 4%-5% annual average revenue growth.