Morningstar | No-moat Agco Reports Double-Digit Top-Line Growth; Maintain $75 FVE
Second-quarter results for no-moat Agco featured double-digit sales growth and operating margin expansion. Every geographic region except South America reported sales growth, and favorable conditions in Western Europe, along with enhanced crop production estimates in the United States, leave a potential catalyst for future growth. We maintain our $75 fair value estimate and believe momentum created in the first half of the fiscal year will continue into the second.Total revenue grew 17% year over year to $2.5 billion, which featured 25% sales growth in North America and 22% sales growth in Europe-Middle East. The U.S. Department of Agriculture revised crop production estimates in the U.S. upwards following a damp spring, and farmers have exhibited greater urgency in replacing equipment after delaying for multiple years. South America sales dropped 13%, which reflects a 14% currency translation loss and a 7% decrease in tractors shipped. A weak first-half harvest in Argentina coupled with changing regulatory conditions in Brazil should hinder demand in the first half of the year, but we expect conditions to improve in the second half, and for full-year total sales in the region to end up roughly flat from the prior year.
For the quarter, operating margins expanded roughly 50 basis points to 4.8%, and we believe higher demand in South America throughout the second half of the year will boost full-year margins above 5%. Net income remained flat at $91 million as higher sales were offset by higher interest expenses and restructuring charges.
Robust global demand and improving crop conditions should provide a short-term tailwind to Agco, but our long-term forecasts remain 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.
AGCO is a manufacturer and distributor of agricultural equipment and related replacement parts. The company sells a range of agricultural equipment, including tractors, combines, self-propelled sprayers, hay tools, forage equipment, seeding and tillage equipment, implements, and grain storage and protein production systems. The company's products are used in the agricultural equipment industry and are marketed under the Challenger?, Fendt?, GSI?, Massey Ferguson? and Valtra? brands. The company distributes its products through independent dealers and distributors. In addition, the company provides retail and wholesale financing through its finance joint ventures with Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A.
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