AGCO Corporation Fundamental Analysis
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AGCO Corporation
Last Updated: 14 Aug 2024
NYSE: AGCO
GICS Sector: Industrials
Sub-Industry: Farm & Heavy Construction Machinery
Table of Contents
You can download a summary of AGCO Corporation's fundamental analysis in PDF here.
Management
CEO: Eric Hansotia
Tenure: 3.6 years
Eric P. Hansotia has led AGCO Corporation as Chairman, President, and Chief Executive Officer since 1 Jan 2021, after serving as Chief Operating Officer from 2019 to 2021. He has played a pivotal role in overseeing AGCO’s regional commercial operations and its global product management, engineering, manufacturing, and supply chain functions. Before becoming CEO, Hansotia held various senior leadership positions at AGCO, including Senior Vice President of Global Crop Cycle and Fuse Connected Services, and Senior Vice President of Global Harvesting and Advanced Technology Solutions.
Hansotia's career began at Deere & Company, where he joined as an engineer in 1993. Over two decades, he held several key positions, including Vice President of Global Platform for the Agriculture and Turf Division, and Senior Vice President of Global Harvesting. His contributions to Deere included assisting in acquiring the Timberjack Group and leading the integration efforts that earned him the Best Investment in Europe award at the 2003 World Investment Conference.
Under Hansotia's leadership at AGCO, the company has launched significant initiatives like FarmerCore, which enhances customer experience by combining physical presence with mobile services. He has also driven continued investment in premium technology and smart farming solutions, supporting AGCO's "farmer-first" strategy.
Let us now analyze the CEO’s compensation.
AGCO Corporation CEO Compensation Analysis. Source: Simply Wall St
Total compensation refers to the sum of all payments and benefits received by the CEO per year. This can include salary, bonuses, stock options, and other perks.
The graph above shows that the CEO’s compensation has been consistent with the company's performance over the past year, which can generally be a positive indication.
Tying compensation to performance metrics like stock price or profit growth incentivizes CEOs to make decisions that create long-term value for the company. This can lead to stronger overall company performance.
Looking broadly at AGCO Corporation’s management team, the average tenure is 4.1 years, which makes it considered experienced.
Business Overview
AGCO Corporation designs, manufactures, and distributes agricultural machinery and precision agriculture technology.
The company offers a comprehensive range of products operating under renowned brands like Fendt, GSI, Massey Ferguson, Precision Planting, and Valtra, complemented by FUSE precision agriculture solutions.
Products:
AGCO's product lineup includes high-horsepower tractors for row crop production, soil cultivation, planting, land leveling, seeding, and commercial hay operations. The company also offers utility tractors tailored for small to medium-sized farms, dairy, livestock, orchards, and vineyards, along with compact tractors for small farms, specialty agricultural industries, landscaping, equestrian, and residential uses.
In addition to tractors, the company provides grain storage solutions, including bins, drying, and handling equipment. AGCO caters to the livestock industry with swine and poultry feed storage, ventilation, and egg production systems.
For harvesting and packaging vegetative feeds, AGCO offers round and rectangular balers, loader wagons, self-propelled windrowers, forage harvesters, disc mowers, spreaders, rakes, tedders, and mower conditioners. These products serve beef cattle, dairy, horse, and renewable fuel industries.
AGCO's offerings also include a broad range of implements, from disc harrows that level seed beds and mix chemicals with the soil to heavy tillage tools that break up soil and mix crop residue into topsoil. Field cultivators prepare smooth seed beds and eliminate weeds, while drills and planters are used for small grain seeding and other planting needs.
The company also provides loaders and combines for harvesting grain crops like corn, wheat, soybeans, and rice. Furthermore, AGCO supplies application equipment, such as self-propelled vehicles and related tools for applying liquid and dry fertilizers and crop protection chemicals after crops have emerged. The company also produces diesel engines, gears, and generating sets.
AGCO Corporation’s brands. Source: AGCO website
AGCO distributes its products through approximately 3,100 independent dealers and distributors across 140 countries.
In a significant development, the company entered a joint venture with Trimble Inc. to create a global leader in mixed-fleet precision agriculture. This partnership aims to deliver next-generation agricultural technologies through AGCO's exclusive provision of Trimble's comprehensive technology offering.
Precision agriculture:
AGCO emphasizes precision agriculture solutions to optimize farm performance and enhance ease of use. Telemetry-based fleet management tools, remote monitoring, and diagnostics contribute to improved uptime, machine and yield optimization, and data-driven decision-making. Precision Planting, Headsight, and Intelligent Ag Solutions brands offer retrofit solutions to upgrade existing equipment, increasing yields and cost efficiency.
The company's precision agriculture solutions leverage connectivity, automation, and digitalization, including satellite-based steering, field data collection, and yield mapping. Combined with the planned Trimble Ag joint venture, these technologies position AGCO to deliver industry-leading solutions across the crop cycle and expand its reach to more farmers worldwide.
AGCO also provides retail and wholesale financing through its finance joint ventures with Rabobank.
AGCO Corporation revenue for the fiscal year ended 31 Dec 2023. Source: Gurufocus
AGCO Corporation geographic breakdown for the fiscal year ended 31 Dec 2023. Source: Gurufocus
Trends, Competition, and Strategy Overview
Market Conditions
AGCO Corporation operates in a cyclical agricultural equipment market, with demand influenced by various factors such as farm income, land values, debt levels, financing costs, planted acreage, crop yields, weather conditions, and the demand for agricultural commodities. Commodity prices, protein prices, general economic conditions, and government policies also play significant roles.
Geopolitical factors, including inflation and regional conflicts, contribute to global economic volatility, leading to potential energy shortages, employment disruptions, supply chain constraints, delivery delays, and logistics interruptions.
While elevated commodity prices in 2022 and 2023 boosted farm income and equipment purchases, these trends are moderating, indicating potential decreases in farm income and equipment demand in 2024. AGCO is exploring strategic options for its grain and protein systems business in response to these market dynamics.
Dealer Support and Supervision
A strong dealer network is crucial for equipment sales. AGCO supports dealers through performance monitoring, improvement programs, and territory management. A comprehensive product line and digital sales and service tools enhance dealer competitiveness.
To further strengthen its dealers' market positions, AGCO offers volume sales incentives, demonstration programs, and other advertising support. Sales programs, including retail financing incentives, are designed to enhance dealers' competitive positions. Furthermore, AGCO ensures parts and service availability through extensive product warranties, which contribute to the overall vitality of its dealer network.
Competition
The agricultural equipment industry is highly competitive, with major players like Deere & Company and CNH Industrial N.V. Regional competitors also hold significant market share in specific regions.
The industry is also seeing increased competition from technology-focused companies and start-up ventures as technology becomes increasingly integrated into all aspects of the crop cycle.
AGCO Corporation Economic Moat
There are many ways to identify AGCO Corporation’s economic moat, but I focus on these five sources. The rating is purely subjective and is based on my in-depth understanding of the company.
AGCO Corporation Economic Moat
Economic Moat: None
AGCO Corporation, a global leader in agricultural machinery and precision agriculture technology, operates in a cyclical industry marked by intense competition. Despite its strengths, establishing a moat remains challenging.
AGCO's strong brand recognition stems from its well-established brands like Massey Ferguson and Fendt. The planned joint venture with Trimble will further enhance its technology portfolio. However, brand loyalty in the agricultural equipment sector is less pronounced than in consumer-facing industries.
AGCO benefits from a moderate cost advantage through its global manufacturing and distribution network, which enables economies of scale. AGCO sources materials and components at competitive prices with multiple production facilities worldwide. Its extensive dealer network also reduces distribution costs, contributing to overall efficiency. However, compared to industry giant Deere & Company, AGCO’s cost advantage is less significant due to its smaller scale. The industry's cyclical nature can also impact production levels, limiting the full realization of these benefits.
AGCO operates in a market characterized by efficient scale, especially in regions where it holds a significant market presence. The agricultural equipment industry requires substantial capital investment and technological expertise, limiting viable competitors. AGCO’s focus on high-horsepower tractors and precision agriculture solutions allows it to scale operations efficiently in these niches.
Switching costs exist, particularly due to AGCO's precision agriculture technology and the integration of its products within farm operations. Farmers who invest in AGCO’s equipment and technology face potential disruptions, loss of compatibility, and the need for new training if they switch to a competitor. The joint venture with Trimble, offering a comprehensive suite of precision agriculture technologies, is expected to increase these switching costs by making AGCO’s platform even more integral to farm management.
AGCO is also building up switching costs and customer loyalty through several initiatives. Its independent retrofit dealer channel allows AGCO to take an on-farm approach to sales, acting as consultants for farmers and creating switching barriers. The FarmerCore initiative brings the dealer to the farm, providing on-site service and utilizing telemetry data for proactive maintenance, further increasing switching costs.
AGCO’s agnostic data platform also enables farmers to manage and maximize their investments in Precision Ag technology across mixed fleets, creating a reliance on AGCO's integrated data management.
AGCO Corporation Performance
My quick performance checklist:
Has AGCO Corporation's revenue consistently grown year over year for the past five years? Yes.
Is the net income consistently increasing year over year for the past five years? Yes.
Has the cash flow from operating activities shown consistent year-over-year growth for the past five years? There was a dip in fiscal year 2021, but the company's operating cash flow has been increasing since then.
Has the free cash flow remained positive for the past five years? Yes.
Is the gross margin % consistent or growing over the past five years? It has increased over the past five years.
Has the EPS shown growth over the past five years? Yes.
In 2023, net sales amounted to $14,412.4 million, representing a 13.9% increase over 2022. This growth was mainly driven by favorable pricing impacts and product mix consisting of high horsepower tractors, combines, hay tools, and application tools, as well as favorable currency impacts.
Income from operations in 2023 totaled $1,700.4 million, up from $1,265.4 million in 2022. The increase was primarily attributed to positive net pricing and a favorable product mix, although it was partially offset by higher selling, general, and administrative expenses and engineering expenses.
AGCO Corporation Revenue, Net Income, Operating Cash Flow, and FCF (USD Million)
Has free cash flow per share increased over the last five years? There was a dip in fiscal year 2021, but it has increased since then.
AGCO Corporation FCF per Share
Management Effectiveness
Has AGCO Corporation's ROE stayed within or above the 12%-15% range year over year for the past five years? It was around 4% in fiscal year 2019 before it shot up and stayed above 14% from 2020 to 2023.
AGCO Corporation Return on Equity
ROE is a measure of a company's profitability relative to its shareholders' equity. A lower ROE compared to its peers may indicate that the company is struggling to generate profits efficiently. This could be due to factors such as lower profit margins, higher operating expenses, or underutilization of assets.
Has the ROIC stayed within or above the 12%-15% range year over year for the past five years? No, it was below 12% in 2019 and 2020.
AGCO Corporation Return on Invested Capital vs Weighted Average Cost of Capital
When a company's ROIC is greater than its WACC, it signifies that the company is generating returns on its investments that are higher than the cost of financing those investments. In simpler terms, the company is making more money on its projects than it costs to fund them. This indicates efficient capital allocation and value creation for shareholders.
The trendline for the number of shares outstanding is declining, which would please an investor.
In Nov 2023, the company repurchased $53.0 million of its common stock through an accelerated share repurchase (ASR) agreement and received approximately 454,552 shares. In Jan 2024, AGCO received an additional 82,883 shares.
As of 31 Dec 2023, the remaining amount authorized for repurchase was approximately $57.0 million with no expiration date.
AGCO Corporation Shares Outstanding (Million Shares)
AGCO Corporation Financial Health
AGCO Corporation Financial Health (USD Million)
Current Ratio: 1.5 (pass my requirement of >1.0, but <3.0)
I use the current ratio instead of the quick ratio to analyze the company’s liquidity. This is because I want a general overview of financial health and the company’s inventory is a significant asset and easily be converted to cash.
The trend of its current ratio has been increasing over the past five years and is generally a good sign.
A rising current ratio suggests the company has a growing pool of current assets (cash, inventory, receivables) relative to its current liabilities (short-term debts). This signifies a greater ability to meet its short-term obligations without needing to sell long-term assets or raise additional funds.
AGCO Corporation’s current ratio over the past five years against its five-year median.
When compared to its industry, AGCO Corporation's current ratio is worse, as it is below the industry median of 1.8.
Debt-to-EBITDA: 4.6 (fail my requirement of <3.0)
This ratio measures a company's ability to pay off its debt with its operating income. A higher ratio may indicate higher financial risk, while a lower ratio suggests more manageable debt levels relative to earnings.
I use the debt-to-EBITDA ratio instead of the net debt-to-EBITDA ratio because I want a straightforward view of the company's gross leverage, focusing on the total debt burden without accounting for cash reserves.
Debt-to-EBITDA can present a more conservative view of a company's financial risk by not considering cash. It is useful for me to understand the worst-case scenario regarding the company's ability to service its debt. Also, it helps that every company has different cash management strategies.
AGCO Corporation’s debt-to-EBITDA ratio has decreased over the past five years. The decrease was due to lower debt and higher EBITDA, which is usually a good sign.
A lower debt-to-EBITDA ratio suggests the company is generating enough cash (EBITDA) to cover its debt obligations comfortably. This indicates a stronger financial position and reduces the risk of default.
As the ratio decreases because EBITDA has increased, it reflects the company’s improved profitability and operational efficiency.
When compared to its industry, AGCO Corporation's debt-to-EBITDA ratio is worse, as it is above the industry median of 2.0.
Interest Coverage: 14.7 (pass my requirement of >3.0)
Debt Servicing Ratio: 7.1% (pass my requirement of <30.0%)
AGCO Corporation Stock Performance
The following line graph is the cumulative total shareholder return on AGCO Corporation’s common stock on an indexed basis as compared to the cumulative total return of the S&P Mid-Cap 400 Index, the MVIS Global Agribusiness Index for the five years ended 31 Dec 2023.
The total returns in the graph are not necessarily indicative of future performance.
Stock Performance. Source: AGCO Corporation 10K
AGCO Corporation Intrinsic Valuation
Estimated intrinsic value: USD $74.59
Value is calculated using the discounted cash flow method (considering their cash and debt) and scenario planning.
Average free cash flow used: USD $510M
Projected growth rate: 7% - 9%
Beta: 1.2
Discount rate: 9.0%
Ideal margin of safety: 45% (Uncertainty: High)
Price range after the margin of safety: <USD $41.00
Date of calculation: 14 Aug 2024
AGCO Corporation Valuation
I use the past 5 years' free cash flow and apply a weighted average, giving more focus on the recent years. I then round the average to the nearest tens. In some instances, I use a more realistic number to represent the free cash flow.
The total debt and cash and short-term investments are the last quarter figures that are rounded to the nearest tens. In some instances, I use more realistic numbers to represent them.
AGCO Corporation Intrinsic Valuation
AGCO Corporation Relative Valuation
AGCO Corporation Price-Earnings Ratio vs its Peers
AGCO Corporation Historical Price-Earnings Ratio
Additional Resources
I recommend reading The Five Rules for Successful Stock Investing as it greatly helps in my stock analysis. If you want a complete collection of recommended books, please visit here.
My Concerns
AGCO's financial performance hinges entirely on the agricultural industry. Economic downturns, rising farm input costs, adverse weather, and plummeting commodity prices directly harm the company's performance. Historically cyclical, the agricultural sector is susceptible to economic fluctuations. Consequently, agricultural equipment sales mirror these cycles.
Farm income, land values, debt levels, and financing costs, all influenced by commodity prices, acreage, crop yields, demand, input costs, and government policies, dictate the industry's health. General economic conditions, interest rates, exchange rates, and government financing subsidies, particularly in Brazil, further impact the sector. Industry trends, such as farm consolidations, also affect equipment sales.
The unpredictability of these factors hinders sales forecasting and production optimization, leading to increased costs. Past industry downturns significantly impacted AGCO, and future volatility is expected.
The agricultural equipment business is highly seasonal, with spring and fall sales peaks coinciding with planting and harvesting. The fourth quarter is crucial due to year-end tax planning, post-harvest funds, and dealer incentives. As a result, AGCO's sales and profits fluctuate quarterly, with the first quarter typically the weakest.
Retail financing availability significantly impacts sales. Economic downturns can disrupt this financing, reducing equipment sales. Furthermore, the collectability of receivables from dealers and customers is critical.
AGCO Finance joint ventures, controlled by Rabobank, finance approximately 50% of tractor and combine sales in their operating markets. Any disruption to Rabobank's financing or business decisions could force the joint ventures to seek alternative funding, potentially impacting AGCO's dealers and customers. Economic downturns often tighten credit availability, increasing borrowing costs and negatively affecting sales.
AGCO and its finance joint ventures hold substantial accounts receivable. Poor collectability due to industry weakness harms the company. Finance joint ventures also lease equipment, risking residual value losses exceeding expectations due to lower used equipment prices and higher-than-expected lease returns. AGCO guarantees some residual values; higher-than-expected defaults and losses could significantly impact the company's performance.
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