AGCO Earnings Beat but Down Y/Y, Shares Fall - Analyst Blog

Shares of agriculture machinery manufacturer, AGCO Corporation AGCO slipped around 2% and closed at $55.70 on Apr 30, a day after the company reported first-quarter 2014 results. Earnings per share declined 13% year over year to $1.03. However, the figure surpassed the Zacks Consensus Estimate of 79 cents per share.

Operational Update
 
In the reported quarter, the company's revenues decreased 2.9% year over year to $2.33 billion and fell short of the Zacks Consensus Estimate of $2.55 billion. Excluding an unfavorable currency translation impact of 2.1%, net revenue dropped approximately 0.8%.

Cost of sales declined 2.8% to $1.82 billion from $1.87 billion in the year-ago quarter. Gross profit in the reported quarter was $514.9 million, down 3.4% from $533 million in the prior-year quarter. Gross margin was 22.2%, relatively flat as compared with the prior-year quarter.
 
Selling, general and administrative expenses amounted to $267 million, up 4.4% from the year-ago quarter. Segment income from operations decreased 12.5% year over year to $165.7 million. Consequently, operating margin contracted 80 bps to 7.1% from the prior-year quarter.
 
Segment Performance
 
Sales in the North America segment rose 3.7% year over year to $647.5 million in the quarter. The segment's income from operations declined 23% year over year to $55.5 million.
 
Sales in the South America segment fell 24% year over year to $353.6 million in the reported quarter. Income from operations for the segment decreased 42% year over year to $27.9 million.
 
The EAME (Europe/ Africa/ Middle East) segment's sales were $1,235.9 million, up 3.6% from the year-ago quarter. EAME's operating income grew 21% year over year to $120.9 million.
 
Sales in the Asia/Pacific segment declined 19.7% year over year to $96.4 million from $120 million a year ago. The segment reported a loss from operations of $1.3 million against the year-ago profit of $5.5 million.
 
Financial Update
 
As of Mar 31, 2014, AGCO reported cash and cash equivalents of $193.9 million versus $1047.2 million as of Dec 31, 2013. Cash used in operating activities was $511 million in the reported quarter versus $261 million in the prior-year quarter.

Long-term debt was $1.13 billion as of Mar 31, 2014, compared with $1.05 billion as of Dec 31, 2013. The debt-to-capitalization ratio remained flat at 22.6% as of Mar 31, 2014.

Outlook

AGCO believes that the global industry demand will soften in 2014 in comparison to 2013. The company reiterated its full-year 2014 earnings per share of approximately $6.00. Net sales guidance has also been maintained in the range of $10.8–$11.0 billion.

The company anticipates second-quarter 2014 sales volumes to fall due to adjustments in dealer and company inventory levels. This, along with a weaker sales mix, is expected to lead second-quarter 2014 earnings per share in the range of $1.65 to $1.70. Additionally, capital expenditures for 2014 will be $400–$425 million and free cash flow is projected to exceed $250 million.

The company believes that gross margin improvement will be somewhat offset by increased engineering expenditures to meet Tier 4 final emission requirements and market development expenses.

Profitability improvement and working capital reduction throughout 2014 are the key areas of focus for the company. AGCO is also targeting to increase productivity and deliver high-tech solutions to help farmers improve their efficiency.

Our View
 
AGCO is set to benefit from strong free cash flow and a focus on earnings growth. The company's strategic investments in production facilities and higher technology products will improve efficiency. Moreover, AGCO's expansion of its business in international markets bodes well going forward. Nevertheless, 2014 will be a challenging year for the company due to the expected decline in demand across most of its markets.
 
Duluth, GA-based AGCO is a global leader in the design, manufacture and distribution of agricultural machinery. It supports productive farming through a wide range of tractors, combines, hay tools, sprayers, forage equipment, tillage, implements, grain storage and protein production systems as well as other related replacement parts.
 
Currently, AGCO has a short-term Zacks Rank #3 (Hold). Some better-ranked machinery makers worth consideration include Alamo Group, Inc. ALG, Broadwind Energy, Inc. BWEN and Altra Industrial Motion Corp. AIMC. All of these have a Zacks Rank #2 (Buy).