Tuesday, 3 February 2015

Agco: a good winner today but still upside

The agricultural machinery and related company Agco was a good winner today which is rather pleasing.  I observed a few months ago when I last wrote up the stock that:

'With the share firming up in the mid-US$40s I believe risk-reward is good here despite shorter-term demand headwinds looking forward into 2015...'

And so it has proven - at least from the perspective of today's quarterly numbers and the share price reaction that resulted from them:

The theme of the results was akin to late last year with dull-at-best sales momentum (noteworthy that during the Q4 period there was at least some positive year-on-year action)...

...but a reiteration of cash flow improvement (assisted by falling inventories) which even with the share price rise equates to a free cash flow yield of over 6%.  Impressive stuff...

...particularly as the company pays a small dividend yield too and is looking to buy back over 10% of the outstanding share capital in the buyback noted below.   

Using forward guidance, the shares trading are at just over x10 EV/ebit which given that any real operational earnings leverage has still yet to kick in still equates to value in my view.

Even with forward uncertainties over farmer incomes, crop prices and ultimately agricultural machinery and related sales, Agco today should still be trading 10%+ above these levels in the US$50-55 range.  Operational earnings leverage into any broader recovery drives this further up but this would be my first review level.  

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