AGCO - AGCO Corporation: Bullish Trends Ahead Of Earnings A Weaker Dollar Beneficiary

2023-07-24 03:54:20 ET

Summary

• Despite S&P 500 profit margins not trending well, AGCO Corporation is recommended as a buy due to a modest P/E and solid free cash flow.
• AGCO, a Georgia-based agricultural equipment manufacturer, trades at a low 10.5 trailing 12-month GAAP price-to-earnings ratio and pays a small 0.9% dividend yield.
• The company's Q1 operating EPS surpassed consensus at $3.51 with revenue at $3.3 billion, a 24% rise YoY, and net sales were 29.6% higher YoY after.
• A weak dollar beneficiary and with solid free cash flow, I highlight key technical levels to watch ahead of and through earnings on Thursday.

S&P 500 profit margins are not trending well, according to FactSet . Still, the bulls don’t seem to care much as equities keep powering higher. This week, earnings season ramps up with a large chunk of Q2 reports hitting the tape from Monday evening through Friday morning.

I have a buy rating on AGCO Corporation (AGCO) as the stock trades at a modest P/E with solid free cash flow. I also spot a key area on the chart that investors should monitor.

Corporate Profit Margins Sagging

AGCO manufactures and distributes agricultural equipment and related replacement parts worldwide. It offers horsepower tractors for row crop production, soil cultivation, planting, land leveling, seeding, and commercial hay operation. The company also provides grain storage bins and related drying and handling equipment systems.

The Georgia-based $10.2 billion market cap Agricultural and Farm Machinery industry company within the Industrials sector trades at a low 10.5 trailing 12-month GAAP price-to-earnings ratio and pays a small 0.9% dividend yield. Ahead of earnings on Thursday morning, the stock carries a somewhat low 26% implied volatility percentage and a modest 1.6% short interest.

Back in May, AGCO reported a solid top and bottom line beat. Q1 operating EPS verified at $3.51, easily surpassing the $2.71 consensus while revenue came in at $3.3 billion, a 24% rise from the same period a year earlier. Net sales were 29.6% higher YoY after backing out unfavorable currency movements.

Amid the strong results, the management team issues a $5.00 special variable dividend and raised its regular quarterly dividend by 21%. What I found quite encouraging was that guidance was considerably above expectations: FY 2023 sales are now seen at $14.5 billion (versus the $14.06 billion consensus) and gross and operating margins are expected to improve from 2022’s levels.

There are a number of macro and micro risks for AGCO, though. Lower grain prices would hurt sales while the recent uptick in North American margins could be temporary if macro conditions worsen. Also, a rise in the USD would negatively impact profits.

A Weaker Dollar Lately May Help AGCO's International Exposure

On valuation , AGCO’s net profits per share are seen as plateauing just shy of $15 over the coming years. While 2023 EPS is expected to be $14.58, a small dip through the out year and 2025 is the consensus. That actually makes valuation rather easy as we have a normalized operating EPS figure to use in multiple analysis.

Still, profitability is strong with AGCO – that is proven by its 24% gross margin and 25% return on equity percentage. What’s more, dividend growth has been solid since 2021, buoyed by the special dividend mentioned earlier. What I particularly like about AGCO is its healthy free cash flow. Total FCF per share is $5.49 over the past four quarters, resulting in an FCF yield of 4%.

AGCO: Annual Operating Profit Growth Stalls

If we assume $14.50 of normalized non-GAAP EPS and apply a 12 multiple, then the fair value should be near $174. I arrive at that P/E based on the firm’s 5-year average of 14.3 compared to the current 9.4 value. With stagnant EPS growth in the coming quarters, I do not believe that we should assign the higher, long-term average earnings multiple, but a single-digit figure is too low considering the broad market has a 19 forward operating P/E. Also, AGCO is downright cheap when assessing both its trailing and out-year EBITDA metrics.

AGCO: Low Trailing and Forward P/E Ratios

Looking ahead, corporate event data provided by Wall Street Horizon show a confirmed Q2 2023 earnings date of Thursday, July 27 BMO with a conference call immediately after the numbers cross the wires. You can listen live here . After that, the stock trades ex its $0.29 quarterly dividend on August 14.

Corporate Event Risk Calendar

The Technical Take

With a compelling valuation ahead of earnings this Thursday, the momentum picture is on the mend in my view. Notice in the chart below that shares have a resistance zone between $144 and $154. A bullish upside breakout above that zone would imply a measured move price objective to just above $200 based on the height of one key feature: There is a bullish head and shoulders pattern taking shape. I spot a head at $92 with a pair of shoulders at $114. The neckline is the aforementioned horizontal resistance. So, if we take that $55 to $60 range and add it on top of the neckline, then we arrive at the target price.

That is just one factor to consider. I also spot a bullish long-term 40-week moving average (equivalent to the 200-day moving average) that was successfully defended on a test back in Q3 and Q4 of last year. More near-term, I like that the stock has climbed above a major congestion zone between $120 and $135 – the volume by price indicator on the left side of the chart shows that there should be some cushion on a pullback.

Overall, I like the setup here and would be more bullish on a rally through the all-time high neckline range.

AGCO: Bullish Head and Shoulder Bottom In Play

The Bottom Line

With a low valuation, favorable chart setup, and solid free cash flow, I like the backdrop heading into earning for AGCO.

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