AGCO Outperforms, Ups EPS Guidance - Analyst Blog

Adjusted third-quarter EPS at AGCO Corporation (AGCO) increased five fold year over year to 66 cents from 13 cents, handily beating the Zacks Consensus Estimate of 48 cents. The strong performance was driven by stringent cost control, higher production, and record sales and operating income in South America.

AGCO Corporation recorded restructuring and other infrequent expenses of a penny in both the reported and the base quarter. Including this one-time expense, EPS in the reported quarter stood at 65 cents, compared with 12 cents in the year-ago quarter.

Revenues

Total revenue improved 19% to $1.66 billion, outperforming the Zacks Consensus Estimate of $1.59 billion, driven by sales growth in all four of its geographic regions. Excluding an unfavorable currency translation impact of approximately 2.7%, net sales increased 21.9% year over year.

Revenues in South America increased a robust 47.1% (39.1% excluding favorable currency translation impacts) to $487.7 million, a third-quarter record, driven by strong market demand in Brazil and Argentina. In the North American region, sales increased 27.8% (26.4% excluding favorable currency translation impact) to $373.4 million driven by increased sales of combines, tractors and sprayers.

Europe/Africa/Middle East (EAME) reported an increase of 2.6% (12.1% excluding unfavorable currency translation impacts) supported by stabilizing Western European industry conditions. Net sales in the Rest of the World increased 16.3% (19% excluding unfavorable currency translation impacts).

Cost & Margin Performance

Cost of sales increased 18% to $1.35 billion in the quarter and, based on revenue, it contracted 80 basis points to 81.76%. Gross profit went up 25% to $303.8 million and gross margin expanded 80 basis points to 18%.

Selling, general, administrative and engineering expenses spiked 10% to $221.7 million in the quarter and, based on sales, increased 110 basis points to 13.4%. The company's adjusted operating profit in the quarter was $77.1 million, a substantial increase of 110% from the prior-year period with operating margin expanding 200 basis points to 5%.

Financial Position

As of September 30, 2010, AGCO had cash and cash equivalents of $459 million, down from $575 million as of June 30, 2010. During the nine months ended September 30, 2010, the company generated operating cash flows of $4.1 million compared with an outflow of $158.6 million in the comparable year-ago period.

As of September 30, 2010, the debt-to-capitalization ratio went down marginally to 15.0% from 15.3% as of June 30, 2010.

Outlook for Fiscal 2010

For fiscal 2010, management projects adjusted EPS excluding restructuring expenses in the range of $2.10 to $2.20. AGCO had earlier guided adjusted earnings per share between $1.85 and $2.00 for  fiscal 2010. Net sales guidance is, however, maintained in a band of $6.7 billion to $6.8 billion. Gross margin improvements are expected to be partially offset by higher engineering expenses for new product development and Tier 4 emission requirements.

Our Take

With a full product line of farm equipment and a wide network of dealers and distributors, we believe AGCO is well positioned to capitalize on the need for increased food production driven by worldwide population growth over the long term. Moreover, the company is also looking to expand operations in high-growth emerging markets, which bode well for future operating performance. We currently have a Zacks #1 Rank (short-term Strong Buy recommendation) on the stock.

AGCO Corporation is a leading manufacturer and distributor of agricultural equipment and related replacement parts. Its product line is categorized under five groups: tractors, replacement parts, combines, application equipment/sprayers and other machinery. The company operates in four geographical segments: Europe/Africa/Middle East (EAME), South America, North America and Asia-Pacific.