Zacks_Analysts' Blog : AGCO Reports Strong Quarter - Analyst Blog

AGCO Corporation (AGCO) has reported fiscal 2011 fourth quarter results, delivering an adjusted EPS of $1.44 versus 88 cents in the year-earlier quarter, surpassing the Zacks Consensus Estimate of $1.33.

Including the net effect of tax gain and acquisition expenses of $1.46 associated with the GSI acquisition, EPS stood at $2.90 in the reported quarter. This was more than three times the 87 cents in the year-ago quarter, which included restructuring expenses of 1 cent.

Total revenue in the reported quarter increased 16% year over year to $2.5 billion driven by strong global demand for agricultural equipment. Revenue was on par with the Zacks Consensus Estimate. Included in the sales was an unfavorable currency translation impact of 2.1%, excluding which sales increased 18.3% in the quarter.

The North American region reported a 29.3% improvement in sales to $598.7 million, while sales in South America increased 1.9% to $448.5 million. The EAME region reported a 13.6% increase to $1.35 billion. Sales in rest of the world increased 55.1% to $123.3 million.

Costs and Margins

Cost of goods sold increased 13% to $1994 million in the reported quarter. Gross profit soared to $524.1 million from $409.2 million in the prior-year quarter reflecting increased production in Europe and North America and pricing partially offset by higher material costs. Consequently, gross margins improved 200 basis points year over year to 21%.

Selling, general and administrative expenses also increased to $246.9 million, from $200 million in the year-ago quarter. Adjusted operating income upped 29% to $185.7 million from $143.5 million in the year-earlier quarter due to higher sales and improved gross margins. Operating margins expanded by 80 basis points year over year to 7.4%.

Fiscal 2011 Performance

AGCO reported adjusted EPS of $4.48 compared with $2.32 in the prior year, ahead of the Zacks Consensus Estimate of $4.37. Including restructuring and other infrequent income and the one-time GSI acquisition items, EPS was $5.95 in fiscal 2011 compared with $2.29 in the prior year. Revenues increased 25% to $8.73 billion missing the Zacks Consensus Estimate of $8.79 billion.

Financial Position

As of December 31, 2011, cash and cash equivalents increased to $724.4 million from $719.9 million as of December 31, 2010. Cash from operations for 2011 improved drastically to $725.9 million from $438.7 million in 2010. As of December 31, 2011, the debt-to-capitalization ratio was 32.9% compared with 14.3% as of December 31, 2010.

Outlook

The company expects tight supplies of soft commodities will support farm income and boost equipment demand. Net sales and EPS are expected to be above $10 billion and $5.00, respectively.

Our Take

The recent GSI acquisition will propel farm equipment maker AGCO into the grain storage and livestock industries. This endeavor is integral to its new vision of expanding its product offerings and entering new markets. AGCO emerged in the early 1990s through a spree of acquisitions and after a lull of acquisition related activities the company is again looking for fresh targets to grow and expand.

GSI gives AGCO strong positions in the grain storage and protein production segments and gives it a baseline for future growth beyond its core farm equipment business. Furthermore, with GSI's 71% revenue coming from North America compared to AGCO’s 22% in North America, the deal will expand AGCO’s presence in this market.

With a full product line of farm equipment and a wide network of dealers and distributors, we believe AGCO is well positioned, over the long term, to capitalize on the need for increased food production, driven by worldwide population growth.

Moreover, the company is also looking forward to expanding its operations in high-growth emerging markets, which bodes 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. AGCO competes with CNH Global NV (CNH), Deere & Company (DE) and Kubota Corporation (KUB).