Tuesday, 28 July 2015

Still seeing value in Agco post numbers

Earlier this year I noted about the agricultural machinery company Agco that: 

'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'.  

The shares have been in this range over the last month or two, so can this level now represent a new support level for a further push deeper into the US$50s?

Today's Q2 numbers from the company were pretty much 'steady as she goes' (despite a small upgrade to FY15e earnings hopes based on some cost cuts and a favourable tax treatment).  The three presentation document graphics that particularly spoke to me were the following highlighting - first - that the production decline was front end loaded although still down c. 10% year-on-year even deep into H215.  

Of course this impacts operating margins although note how they have started to recover during the last quarter reflecting the start of some of the benefits from cost cutting.  

Finally free cash flow continues to be expected to materially improve reflecting working capital, capex constraint and related improvements.
Running all this through, I still see the company on little more than a x10 EV/ebit valuation and generating nicely in excess of a 5% free cash flow yield.  Agriculture remains a positive mega theme for me over time.  In essence I still see value in Agco deeper into the US$50s. 

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