"Baby take my hand... don't fear the reaper" -- Blue Oyster Cult
Sometimes things just don't turn out the way people expect. When grain prices rocketed up in 2003 and 2004, investors scrambled for tag-along plays. While some of them worked out (fertilizer, seeds, rail shipping), investors hoping for some sizzle in the agricultural machinery space were left a bit disappointed, particularly those investors in AGCO Corp.
AGCO's results for the fourth quarter were OK. Sales were up 15% once the impact of currency and an acquisition are stripped out, and operating income was up 39% (including the acquisition). Free cash flow generation was actually pretty strong for the full year, coming in at $187.5 million versus about $10 million in the prior year.
AGCO had double-digit sales growth in North America, Europe, Asia, and Africa, but growth in the key South American market was just under 10%. While South America contributed roughly 30% of operating income in last year's December quarter, this year's result was only 22%.
Looking into 2005, South America will be even more of a problem. AGCO estimates that the industry as a whole will see 20% to 30% declines in 2005 and thinks its revenue in South America will drop by about 12% for the year. Growth elsewhere is also less than robust. The European market projects to be flat, while the North American business looks to be flat to up only 5% for the year. What all of this boils down to for AGCO is that sales for 2005 will be up only about 5% and earnings growth may be less than that.
With the fourth quarter in the books, the company has a trailing P/E of 11 and an EV-to-FCF of 15. Although AGCO shares don't look expensive, that doesn't make them a bargain either. AGCO has low margins relative to competitors like Deere
Although some investors will no doubt be attracted to the low P/E, I just can't get excited about a low-margin company in a highly competitive cyclical business that pays no dividend and is looking for basically flat growth in the year ahead.
Fool contributor Stephen Simpson, CFA, has no ownership interest in any stocks mentioned.