AGCO Beats On Lower Profits

AGCO Corp. (AGCO: 31.87 +0.15 +0.47%) reported fourth-quarter earnings of 35 cents per share, beating the Zacks Consensus Estimate of 30 cents, but 67% below the prior-year EPS of $1.05. The significant decline in quarterly earnings compared to last year was primarily driven by lower sales volumes and weaker product mix. 

Net sales for the quarter were $1,852.5 million, down 14.1% compared to the fourth quarter of 2008. Excluding favorable currency translation impact of 10.1%, fourth quarter sales fell 24.2% year over year. AGCO is experiencing soft demand conditions in most of its markets. Ongoing credit constraints, along with expectations of decreased farm income, are hampering investments in farm equipment, especially in developed nations. AGCO has aggressively cut production in order to reduce its own and dealer’s inventories. 

Sales in North America were down 42.1% on a constant currency basis primarily due to expectations of lower farm income. Also contributing to this decline is a reduction in dealer inventory. The largest decline was witnessed in the sales of lower horsepower tractors due to continued weakness in the landscaping, residential construction and dairy sectors.
 
In the EAME region, quarterly sales were down 27.0%, excluding the impact of foreign currency translation, reflecting soft demand conditions in France, Germany, Finland and Scandinavia and significant weakness in Russia and Eastern Europe due to ongoing credit constraints. 

Sales from the South American region were up 3.5% (excluding favorable foreign currency exchange impact of 27.4%) primarily driven by improved demand conditions in Brazil as government financing programs improved the outlook for farm income. The Brazilian government’s special financing plan for small farms continued to stimulate sales of lower horsepower tractors.
 
Finally, sales from the Asia-Pacific region showed a strong improvement of 62.1% (excluding favorable foreign currency exchange impact of 36.4%) due to improved crop production.
 
Going forward, the company sees continued weakness in Europe and North America in the near-term. However, this is expected to be offset by expected growth in developing nations such as Brazil. 

For 2010, AGCO expects revenue in the range of $6.6 - $6.8 billion, compared to $6.6 billion in 2009. The company anticipates full-year EPS in the range of $1.55 - $1.65. However AGCO forecasts a net loss of 10-15 cents per share for the first quarter of 2010 due to tight dealer inventory management in North America and Europe.
 
AGCO is expanding its presence, especially in emerging markets such as Central and Eastern Europe, the Far East and China. Management stated that the company will invest significantly in future to support a growing list of new product programs, to develop new markets and to improve its distribution. 

Despite an uncertain outlook for the next few quarters, we are bullish on AGCO’s long-term fundamentals. With a full product line of farm equipment and its wide network of dealers and distributors, we believe AGCO is well-positioned to capitalize on the need for increased food production over the long-term.