Tuesday, 29 July 2014

Agco - back at one year lows, FY14 guidance cuts...and I conclude it is time to buy a few more

I have talked positively about agriculture as a theme a number of times but Agco today was a bit of a disappointment with the shares falling basically to one year lows:

 
So what did the market not like?  Face value numbers looked fine with Seeking Alpha reporting that:
 
  • AGCO (NYSE:AGCO): Q2 EPS of $1.77 beats by $0.07.


Well, the sales line was a bit grotty across the board although I would argue that this was fairly expected. 
 
 
 All the other key metrics were sequentially pretty poor too:
Additionally free cash flow was pretty shabby as well, although expected to improve in the second half:
So plenty of ammunition to push the shares down?  Well...taking a look at my May report all these factors were pretty much expected and disclosed then. 

If it was not then poor sales into the Brazilian market on government funding delays or the company looking to 'further increase our capital expenditures in order to continue to work to meet the Tier 4 emissions requirements, refresh and expand our product line, and establish assembly capabilities in China', what did influence the share price?

Well if we look at the expectations published today for FY14...

...and compare then with the disclosures three months ago (below)...
 
...we have our answer: a poorer sales ('softer end markets' hurt by mixed weather) and EPS expectations.  Still pricing is positive and the impact of currencies is anticipated to be neutral.  Additionally the free cash flow guidance is held and this equates to a 5%+ free cash flow yield. 
So how are the company going to react to all this?  Sensibly they are keeping things tight:

'The short-term cost reduction actions and production cuts should see us through the current market softness, while our strategic investments should position us for profitable growth as market conditions improve'

Additionally I note that the company continues its share buyback which back in May I noted the US$500m programme was equivalent to around 8% of the company's EV back then (a little more now). 

So a good theme but transitory market dullness.  The 5% free cash flow yield is attractive plus the company is undertaking the right initiatives with cost control and buy backs. Whilst the earnings multiple will deteriorate a little (a US$5 EPS implies a current P/E of x10 and an EV/ebit of about x8.5) these are still relatively attractive levels. 

And the share is back at a big 'law of round numbers' point of US$50. 

Feels like time to buy a few more. 

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