EUR 850.00 For Business Accounts Only

Morningstar | Global operations create opportunities, but harvesting margin improvements remains a challenge.

Since being spun out in 1990 from Klockner Humboldt Deutz, Allis-Gleaner Corp. (now Agco) has carefully assembled its product portfolio via a series of acquisitions that have expanded its geographic presence from a predominately North and South America focused company to a worldwide agricultural enterprise. Today, Agco is not only the most globally diversified agricultural machinery company that we follow but also the only pure-play agricultural company. With over 3,000 global independent-dealers, Agco has built a robust platform to distribute its wide range of offerings. Around 70% of sales come from tractors and replacement parts that are sold under the company’s several brands: Challenger, Fendt, Massey Ferguson, and Valtra. To counterbalance the agricultural sector’s inherent volatile variables, such as weather patterns, the company has vigorously sought to reduce the cyclical nature of the equipment business by pursuing acquisitions in grain storage and protein production (lower crop prices translate into low input costs for livestock); in 2017, around 12% of sales were driven by grain handling and protein production equipment. We believe Agco’s expansive network across several regions also allow it to benefit from the tailwinds associated with increasing agricultural mechanization and higher calorie consumption in emerging markets. For the past decade, a prevalent investment thesis for agriculture companies was based on a need for increased farm productivity in developed markets to satisfy growing ethanol mandates or in emerging markets to satisfy higher caloric intake and changing dietary patterns. Globally, the major ethanol consumers--the United States, Europe, and Brazil--have reduced the pace of ethanol consumption because of ethanol's cost structure and global politics surrounding the use of food to fuel automobiles. Thus, in our opinion, ethanol production will not significantly increase the need for more planted acres and higher acreage yields, rather growing emerging-market calorie consumption and dietary patterns will. With about 25% of sales from emerging markets, Agco is uniquely positioned to benefit from this shift.