Down 15.4% this year, AGCO (NYSE:AGCO) doesn’t initially jump out as a company to be particularly excited about. This manufacturer and distributor of farming equipment has so substantially fallen short of the S&P 500 returns that it’s easy to lose track of it altogether.
But the further it has slid in price, the more compelling the underlying business has become across a host of key financial metrics. So is it finally time to buy AGCO?
If you’re not too familiar with AGCO, the first thing to be aware of is it’s a farming giant that generated $3.4 billion last quarter. Moreover, it has grown year-over-year revenues in 11 of the past 12 quarters.
That’s attributable, at least to some extent, to the firm’s broad product range that spans beyond tractors and combine harvesters to include tillage, seeding, hay and forage equipment.
It’s also a function of the firm’s international scope that encompasses North America and Europe, as well as emerging markets. This broad geographical reach also ensures meaningful diversification of revenues and helps to limit concentration risk to any single region.
A further revenue driver has been the dealer network cultivated by management, resulting in a network that ensures solid distribution and after-sales service that are both crucial to customer loyalty and ongoing sales.
Speaking of those buyers, they have grown increasingly loyal as AGCO has improved its precision agriculture technologies, and relied on data and analytics to enhance farming efficiency.
Farming Is Big Business
In 2022, AGCO generated $12.6 billion in revenues, up 13.6% from the year prior, and reported gross margin of 23.7%.
Compare that to 2015 when the firm brought in $7.4 billion with 20.9% margin and you can see how far it’s come.
Over the past couple of year, operating income has eclipsed $1 billion and, better yet, every year over the past decade it’s been substantially positive.
Indeed, earnings per share have been in the black in each year over the past decade too. The accumulation of all those profits has been good for the balance sheet too, which has grown cash from $426 million in 2015 to $789 million last year.
Long-term debt, over that same time frame, has climbed marginally from $931.1 million to $1.26 billion.
And what about the all-important cash flows? Ten years ago levered free cash flows were $405 million and last year they were $449 million. In the intervening years, they were all positive too.
So what does it all translate to for AGCO shareholders and prospective buyers?
Is AGCO Stock Undervalued?
AGCO stock is 24.9% undervalued according to the consensus of 14 analysts who have a $142.79 per share price target.
With that said, sentiment has shifted negatively with ten analysts revising their guidance lower for the upcoming period.
It’s quite possible, though, that AGCO share price has largely reflected the bearish news given that it’s largely held steady over the past month after a 5.5% decline over the past six months.
And a discounted cash flow forecast analysis puts fair value closer to $167 per share and infers upside opportunity of 44.3%.
A compelling argument can be made that AGCO stock has a lot more upside opportunity than downside risk, so is it time to plant a seed and buy the stock?
Is AGCO Stock a Buy?
On a number of key financial metrics, AGCO stock makes for a compelling Buy opportunity.
Let’s begin with the dividend, which sits pretty offering a 5.3% yield. Notably, the payout ratio is just 6.8% so there is ample room to increase this yield over time should management wish to do so.
A history of strong earnings allows the top brass a lot of flexibility when it comes to sustaining a dividend payment long into the future. And profitability doesn’t appear to be in question anytime soon.
With a ten year track record of squeezing out positive earnings every single year, and EPS forecast to stay well above $10 per share over the coming years, shareholders can be quite confident that dividend income will continue to flow.
The company’s profitability is further protected by a clear moat that the company enjoys as evident from its sky high 21.7% return on invested capital.
Management is also doing a phenomenal job on the key return on equity metric, which now sits at 29.3%.
Arguably, the standout metric now for those considering dipping a toe into the agricultural waters is the price-to-earnings ratio that stands at just 7.5x.
It’s clear that AGCO now trades at a really low PE multiple when compared to forward-looking earnings growth.
The financial picture looks really appealing when you factor in consistently rising earnings per share, strong levered free cash flows to cover interest payments, and the firm’s prominent position in the farming industry.
Farming stocks don’t tend to attract a lot of interest from financial media outlets but perhaps that’s where opportunity lies, in an off-the-radar, high quality stock posting great numbers year after year.
Certainly, AGCO won’t ever have the ability to grow at the kind of pace that software firms will, not least because it sells heavy machinery and equipment that cannot easily be scaled globally.
Nonetheless, there comes at a time when even a business like AGCO that doesn’t have all the shine and polish of a hot cybersecurity stock is priced at a level so low that it becomes highly appealing.
Whether it’s the firm’s price-to-earnings ratio, its steady history of earnings, compelling dividend or low price-to-sales ratio, AGCO ticks so many boxes for a value investor that it’s hard to pass over.
And now trading at just 2x book value alongside a depressed share price and with a forecast for continued steady earnings for the foreseeable future, now seems to be as good a time as any to snap up this farming stock.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.