How Much More can AGCO Grow?

by Mark Bern, CPA, CFA

Editor’s note: Global Economic Intersection welcomes Mark Bern, a frequently published author at Seeking Alpha on investment analysis, tactics and strategy.  Mark will post investment analysis here on a regular basis, as well as summaries of his extensive work at Seeking Alpha.

AGCO Corporation (NYSE:AGCO) stock has experienced a stellar rally since its recent low near $30 in early October 2011. With the price at $53.17 (at the close on Friday, February 17, 2012), even after giving up some of the gains, this stock is up about 70% in less than five months. I can’t help but think about how appropriate it is that a company which serves the agricultural industry is a genuine growth company. But that is past history. What really matters to investors is what does the future hold?

When I think of farm equipment, I think of Deere (NYSE:DE). I tend to be a conservative, long-term investor but I won’t shy away from a company that creates a dominant position within its industry and still retains a potential for outsized growth. So, let’s take a look at the numbers for AGCO compared to the bell-weather for the industry.

So far, AGCO seems to have the edge. The company expects its recent acquisition of GSI Holdings to be accretive to earnings in 2012, adding about $0.25 per share. While Deere has the stronger presence in North America, AGCO is better positioned in Europe, Middle East and Africa deriving nearly half of its revenue from that part of the world. While business in Europe remains strong, according to the company, I am hesitant to count those chickens while their still in their eggs. My concern is that the strength in the European market is likely to drop off a cliff over the next two or three years, maybe longer. It doesn’t really matter if a solution to the sovereign debt crisis is worked out or not because austerity measures will dampen growth and likely cause a recession. The depth and duration of the recession is the lingering question. That is where the solution/no solution outcome could help with the definition of parameters. But none of those questions will be answered in advance as we will just have to wait and watch them unfold. My point is that heavy dependence on European sales could be a drag on growth. That is why I think that AGCO growth is likely to slow down to a more pedestrian pace of less than 10%; maybe as low as 7% on average over the next five years.

My expectations for Deere over that same period are for an average of 12% earnings growth. Deere also pays a dividend and which it has increased for eight consecutive years. The most recent increase was 31%. I don’t expect a repeat of that action soon, but I do expect the dividend to increase by an average of about 12% per year over the next five years. The history shows AGCO a slight winner, 4 to 3. But the future, I believe, will belong to Deere.

While I still think that AGCO is a good company I believe that the current price is a fair valuation for the company and that it does not represent the bargain that it did last October. I rate this stock a hold and think new money could find better opportunities elsewhere. Happy Investing!