Why I chose AGCO ?

About AGCO-

AGCO is a global leader focused on the design, manufacture and distribution of agricultural machinery. AGCO supports more productive farming through a full line of tractors, combines, hay tools, sprayers, forage equipment, tillage, implements, grain storage and protein production systems, as well as related replacement parts.

Its products are sold through five core brands, Challenger, Fendt, GSI, Massey Ferguson and Valtra. These are distributed globally through 3,150 independent dealers and distributors in more than 140 countries worldwide. It has 20,300 employees worldwide. 

Historical data – 

Year	Rev/share	Earnings/share	Div/share	Earnings growth
2013	110.8	6.09	Q/0.1	16.22%
2012	102.9	5.24	-	17.23%
2011	90.26	4.47	-	95.20%
2010	74.04	2.29	-	59.03%
2009	71.72	1.44	-	-64.79%
2008	91.73	4.09	-	60.39%
2007	74.53	2.55	-	131.82%
2006	59.61	1.1	-	-24.14%
2005	60.21	1.45	-	-15.70%
2004	58.34	1.72	-	75.51%
2003	46.35	0.98	-	139.02%
2002	38.87	0.41	-	-

Growth Opportunities – 

Best thing I like about AGCO is the diversification it provides – in 2012 only 26% of revenues are from North America; 52% came from Europe, Middle East & Africa; 19% came from South America; 3% came from Asia pacific.You are getting world growth in agriculture industry with this company.

To diversity its product line, it has made number of acquisitions over the past few years and is aggressively expanding in Africa and South America. I believe it is the place to be for this business in the next decade. It can grow easily at 10-15% annually for the next few years.

My bottom line –

I bought AGCO at $51.x in March 2012. It went all the way down to $38 in May 2012 and I wish I added to my position. I got too greedy and had a limit buy order waiting at $35.xx to double down on my position but it bounced back from $38.

Agricultural machinery business in general is volatile compared to other sectors due to various factors – weather/drought conditions, crop prices, seasons, harvesting/planting etc. and you can see that in historical data. But I believe AGCO is undervalued at PE 11.x (forward PE is 10.x) while S&P trades at 17.x. It has a PEG ratio of 0.8x based on next 5 yrs expected earnings. 

It carries a manageable amount of debt and has a current ratio of 1.72 (more than 1.5 is very good), so I’m not worried about debt.  AGCO’s competitor DE has current ratio of 2.2x which is better than AGCO’s ratio. But I believe 1.72 is a very good ratio. In  comparison, CAT has a current ratio of 1.3x, KO has a current ratio of 1.0x, IBM has 1.2x and these companies need no introduction. 

It started paying out dividend of 40 cents annually which translates to 0.65%. It’s not a great yield for dividend yield seekers but it is paying out less than 8% of its earnings. It has lot of room to increase its dividends and I believe it will in the upcoming years.

So I believe AGCO is reasonably valued. I’m long AGCO.