AGCO (AGCO) is based in Georgia. It manufactures agricultural equipment under the Challenger, Fendt, GSI, Massey Ferguson, and Valtra brands.
As I write this early in Tuesday trading, AGCO stock is down 2.2% on the day. In the process, it hit its 18th 52-week low of the past year. As a result of these 18 instances, its shares have fallen by more than 22% over the past 52 weeks.
If you’re a value investor, there are good reasons to consider the company’s stock. Here are three right off the top of my head.
Why Are the Shares Down So Much?
Agco reported its Q4 2023 results on Feb. 6 before the markets opened. It delivered results that missed on the top and bottom lines. AGCO stock initially gained on the news but has fallen down 11.3% in the two weeks since.
As I said in the intro, it hit its 18th 52-week low today, which sits at $106.42, with a 52-week high of $145.53. It’s 26% of that high hit in March 2023.
The primary reason for the correction in Agco’s share price is lower commodity prices. When farmers aren’t flush, they pull back on equipment purchases. According to Barron’s contributor Al Root, corn prices are down 35% over the past 12 months, while soybean prices have fallen about 21%.
It’s a cyclical business, for sure. Investors who consider buying its stock, regardless of its value, need to think if they can handle the volatility of an industry dictated by commodity prices.
As for the miss, it delivered revenue of $3.8 billion, with $3.78 a share in earnings. The former missed by $200 million, while the latter was 24 cents shy of the analyst estimate.
There Is Plenty of Good News to Hang Your Hat On
For 2024, Agco’s full-year net sales were $14.4 billion, a company record, up 13.9% over 2022. Its net income for the past year was $1.17 billion, 31.7% higher than a year ago.
There should be no complaints from shareholders about the financials from the past year. Nor should it be too surprising that its 2024 guidance calls for $13.6 billion in sales (6% lower than 2023) with earnings per share of $13.15 (15% lower).
“Despite a lower sales forecast, we expect higher and more resilient margins compared to past cycles due to structural improvements in our business,” stated Agco CEO Eric Hansotia.
“We will continue to accelerate investments in premium technology, smart farming Solutions and enhanced digital capabilities to support our farmer first strategy while helping to sustainably feed the world.”
The other thing to remember about the 2024 downturn is that 2023 involved record global crop production, leading to record inventories and lowering prices.
Again, it’s not an industry to invest in if you’re not prepared for the inevitable correction in commodity prices, which were extremely high over the past two years from a historical perspective.
More good news in 2023: Its North America and EME (Europe, Middle East) operating regions grew revenues by more than 10%. They account for 78% overall.
Its Valuation Is Relative
A financial metric that I like to consider is free cash flow yield. Some people use free cash flow and enterprise value, while others use market cap. Agco’s free cash flow in 2023 was $585 million, 30% higher than in 2022.
Based on an enterprise value of $9.1 billion and a market cap of $8.2 billion, its respective FCF yields are 6.4% and 7.1%, respectively. Anything above 8% is value territory. It’s on the doorstep.
The company’s shares trade at 8.1x its 2024 EPS of $13.15. Over the past five years, Agco’s five-year average forward P/E ratio was 12.8x, about 50% higher than its current valuation. Further, its earnings yield (the inverse of P/E) is 14.3%. Over the past decade, it’s never been this high.
From the company's historical perspective, its shares are fair value, if not cheap.
Consider that Deere & Co. (DE) has an earnings yield of 9.5%, 34% lower than Agco’s, while its market cap is 11.7x operating cash flow, 58% higher than Agco’s at 7.4x.
I’m not suggesting Agco is in the same league as John Deere. However, strictly from a valuation perspective, it’s obvious which is the better buy at current prices.
The Bottom Line
Agco’s net debt as of Dec. 31, 2023, was $931.1 million, or less than 12% of its $8.03 billion market cap. Deere’s, excluding its financial services division, is $19.4 billion, or slightly more than 19% of its $99.9 billion market cap.
Both businesses are conservatively financed, which is excellent. However, while DE stock is a superb long-term buy, AGCO stock is the value play.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
