EUR 850.00 For Business Accounts Only

Morningstar | Despite Weak Sales in Latin America and Lower Protein Production Equipment Revenue, Agco Outperforms

No-moat Agco increased its operating margin in the first quarter to 4.7% from 2.8% in first-quarter 2018. Agco’s first-quarter revenue of $2.0 billion beat consensus by $34 million while GAAP EPS of $0.84 beat consensus of $0.46. Based on strong sales of grain storage equipment, operational improvements, and a lower tax rate, management raised 2019 EPS guidance to $4.90 up from $4.60 provided in the fourth-quarter 2018 call. Despite this near-term optimism, we remain concerned about the USDA forecast for crop price declines along with increased competition in the global equipment industry. Agco’s long-term goal of achieving a 10% operating margin remains elusive, and we are maintaining our fair value estimate of $70.

Overall sales declined 0.6% year over year in the first quarter but were up 7% on a constant currency basis. Sales to international customers account for 82% of corporate revenue, so the strong dollar significantly eroded its international sales. Across all geographies, sales of grain and seed equipment were up 15%. Somewhat unexpectedly, sales of protein production equipment were down 10%. The combined sales of both products, previously reported as the GSI segment, were flat for the quarter at $203 million versus $205 million in the first quarter of 2018. We are optimistic about GSI’s prospects as its sales are counter-cyclical and will continue to benefit from growing protein consumption. Near term, however, there is weakness in swine production in China due to disease and in the United States as several large projects come to an end.

Sales in South America declined a disappointing 14.3% due to economic weakness in Argentina and product transitions in Brazil. On a more positive note, Brazilian farmers are increasing their adoption of Agco’s precision planting technology. Overall, management is expecting improvement in Brazil later this year will boost operating margin in South America by 300 basis points.

Agco’s largest segment, Europe/Middle East, was a strong performer in the quarter with revenue up 4% year over year and up 13% on a constant currency basis. Operating margin expanded 10.5% from 8.5% in the first quarter of 2018. Warm weather and operational improvements contributed the increase. Strong milk and wheat prices are likely to bolster this segment’s revenue in the remainder of 2019.

North American revenue was down 1.3% year over year. Industrywide tractor sales were down 3% year over year due to poor weather and flooding in the farm belt. The USDA is forecasting farm income to be down in 2019 compared with 2018. We believe that competition from Deere and CNH is likely to remain very strong in North America, so we are modeling revenue to increase by only 1.7% in North America for 2019 compared with our prior estimate of 2.0%.