Agco Earnings: Ag Demand Remains Solid but Is Starting to Moderate From High Levels

Agco AGCO reported third-quarter earnings largely in line with our expectations. Sales increased to $3.4 billion in the quarter, up 10.7% year on year. Agco pointed to solid demand for large ag equipment as a key driver to top-line growth. Adjusted operating margins expanded 190 basis points to 12.6%, largely due to strong price realization and favorable sales mix.

All in all, we left our $156 fair value estimate unchanged. We believe Agco’s shares are undervalued at current levels, trading approximately 27% below our fair value estimate. In our view, the market has increasingly grown concerned with ag demand peaking over the past few months. In general, we agree that ag demand is likely closer to the top of the cycle today, but we’re not forecasting a downturn any time soon. We believe ag fundamentals still support demand growth in 2024, leading us to project mid-single-digit sales growth for Agco.

Management rightfully pointed to a few catalysts that will support demand in the near term. First, the stocks-to-use ratio for many crops is increasing but still remains relatively low compared with past cycles. Second, input costs like fuel and fertilizer are moderating, which have taken a huge bite out of farmers’ net income in recent years. Looking ahead, we agree net income for farmers will be down slightly in 2023, given easing commodity prices. With less money in their pockets, farmers will likely pull back on new equipment purchases. However, we think elevated fleet ages will counter this trend, supporting replacement demand. Fleet ages have come down modestly in recent months but remain above past cycles.

We were encouraged to hear the firm’s order book extends in 2024 for some regions. North America is the strongest region, with orders already booked up for 2024. In Europe, the order book takes Agco out to the second quarter of 2024. Agco has been more selective in South America, where they have only taken orders through the end of 2023 to stay ahead on pricing.