AGCO - AGCO Corporation: A Strong Bet on Rising Commodities

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The prices for soft commodities, such as soybeans, wheat, and corn, began to surge in 2020 and have continued to experience gains so far in 2021.  When commodity prices rise, the demand for farm equipment skyrockets. As a result shares of AGCO Corporation (AGCO), the third-largest agricultural equipment manufacturer in the world, have doubled in the past year 

The company was spun off from Klockner-Humbolt-Deutz in 1990. Since then, it has acquired more than 30 companies to become a major player in the agricultural equipment industry. AGCO sells products through 4,200 dealers in close to 150 countries. Its five leading brands are Challenger, Fendt, GSI, Massey Ferguson, and Valtra.

The company had previously been focused on selling lower-margin tractors, but due to an increasingly competitive tractor market, AGCO expanded its portfolio to include grain storage and seed handling machinery. While tractor sales make up more than half of its revenue, the company is trying to diversify away from them.

That's because the company has been focused on driving growth in areas that deliver higher margins. Plus, it has also been aiming for efficiency and reducing costs. For instance, AGCO is striving for a 10% operating margin based on the uptake of its Fendt family of products, adding plants to new locations such as Europe, and focusing on improving service levels to help drive more Parts & Service sales.

The company is also benefiting from its revenue in emerging economies, where the demand for farm equipment is increasing. In its most recent report quarter, AGCO saw its sales rise 8.1% to $2.72 billion due to improved demand for farm equipment. The company was also able to increase its margins based on better pricing and cost-cutting initiatives.

When it comes to farming equipment, sales are dependent on farm income. And, guess what? Farm income is expected to increase significantly due to higher government farm program payments through the expansion of the Coronavirus Food Assistance Program. That certainly bodes well for AGCO. So much so that earnings are expected to jump 26.7% this quarter.

In addition, global commodity prices appear to be heading higher after dropping last year. Increasing demand for commodities has been driven by a growing global population and a rise in emerging market consumption. Improving demand for commodities will also aid farm income and convince farmers to increase spending on agricultural equipment.

AGCO has an overall grade of B, which translates into a Buy rating in our POWR Ratings system. The stock also has a Value Grade of B, which is not surprising based on a few valuation metrics. The company has a forward P/E of 17.99 and a Price to Sales ratio of 1.0, well below its industry average. AGCO also has a Sentiment Grade of B, which means analysts are fond of the stock. According to Marketbeat, AGCO has an analyst Consensus Rating of Buy.

We also provide grades for AGCO based on Growth, Momentum, Stability, and Quality. If you would like to access those, click here. AGCO is also ranked #5 in the Agriculture industry. For other top stocks in this industry, click here.  

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AGCO shares were trading at $125.76 per share on Thursday afternoon, down $0.28 (-0.22%). Year-to-date, AGCO has gained 22.15%, versus a 0.75% rise in the benchmark S&P 500 index during the same period.

About the Author: David Cohne

David Cohne has 20 years of experience as an investment analyst and writer. Prior to StockNews, David spent eleven years as a Consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers.

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