AGCO Corp. (AG) reported second quarter EPS of $1.34, above our estimate at $0.90, due to a smaller-than-expected loss in North America and continued robust growth in South America and the EMEA [Europe, Middle East and Africa] region. The sales growth was broad-based, with every geographic region posting a double-digit sales increase. The growth in commercial farm income and acreage is driving demand for high-horsepower tractors.
While North America reported a loss, we expect a second half profit recovery on the back of favorable currency translation, higher margins, and double-digit sales growth. Our target price is $57, based on around 14.7x our 2008 EPS estimate of $3.87
Despite the management's cautious EPS forecast of $3.60 to $3.70 for 2008, we believe there are several long-term trends that point to higher earnings growth. The first promising trend centers on the likelihood of greater demand for combines in North America as a result of higher corn prices. This should lead to increased sales for the Massey Ferguson brand.
We applaud the company's move to cut production and lower inventory levels, which helped reduce inventory levels but at the expense of lower earnings and sales. Going forward, the company will have easier comparables.
Besides a global sales recovery, the company will also benefit from future productivity gains driven by several initiatives being implemented until year-end 2008. Despite a challenging operating environment, AG continues to produce positive free cash flow. However, near-term earnings may be negatively impacted by greater spending on engineering and other expenses.
Read the full analyst report on AG
Get real-time market insights and profitable stock recommendations from the team of analysts at Zacks Equity Research. See all todays Analyst Blog entries on Zacks.com.