Tuesday, 15 December 2015

Agricultural sector insights at Agco's Investor Day

Back in October when I last wrote up my thoughts on the agricultural machinery and related company Agco I noted:

'I found the tone of the Q3 update slightly better than expected and it resulted in a tweak up in EPS hopes (US$3.20 versus US$3.10!) and a maintenance of the free cash flow expectations (a handy 7% free cash flow yield at the prevailing share price) even if sales and capex were both cut back: 


Given agricultural markets have remained difficult how has the company got on in the interim and how it is seeing 2016?  On the former expectations remain unchanged and the strength of the structural agricultural theme is still very apparent as noted by the estimated growth in protein demand over the next few decades.
However 2016 preliminary hopes show discernibly lower adjusted EPS and cash flow than anticipated in 2015.

Well that's not great...and hence no wonder the stock is down today (and once again failing to pierce decisively the mid US$50s):

No surprises for the reason for this guidance dullness: weaker demand


And so production levels are down.  Note that this is true across the full year with even anticipated Q416 fade. I note on another slide however that they are keeping pricing up with positive shift in this metric of +2% anticipated in FY16e.  A small positive to take from a not great statistical backdrop.  

The rest of the presentations were taken up with what I would regard as usual observations including grain storage opportunities, standardisation benefits, new product launches...

...and the growth of the parts division (and other service initiatives).  All completely sensible and expected.  

With free cash flow falling to a c. 4% yield and the EV/ebit multiple even with the lower share price mechanically rising to a low teens level, Agco is back to being a forward value hope investment.  For me the theme remains good and there is technical support in the lower US$40s but again investors are having to hope for the tailwind of higher crop prices and the like. I will remain an investor - and maybe even augment in the lower US$40s - but I can understand why some people will be sceptical. 

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