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Krishna K

AGCO (NYSE: AGCO) is the 3rd largest manufacturer of agricultural equipment world-wide. The company makes products such as tractors and combines, and distributes its products through a network of dealers and distributors to the farmers.

Since AG generates nearly all of its revenue from sales of agricultural equipment, much of its success hinges upon the health of the agriculture industry and crop prices. One current trend that may play to AG's advantage is the increased interest in corn-based ethanol. Ethanol-based energy research and development over the next several years could lead to continued growth in demand for corn and, of course, the tools needed to plant and harvest more of it. Increasing demand for food in developing countries could also positively impact AG's sales. As both populations and personal incomes grow in emerging markets, demand for both grains and grain intensive products such as meat should increase as well. With 75% of its 2006 revenue generated outside of the U.S., AG has greater exposure to developing countries than any of its competitors.

Business Overview

AGCO primarily makes tractors, combines, and other agricultural equipment.

• Tractors: the company sells its tractors under a variety of brand names including AGCO, Challenger and Massey Ferguson. Its sizes range from compact tractors (used on small farms), utility tractors (used on small and medium-sized farms), and high horsepower (used on larger farms and on cattle ranches). Tractors accounted for approximately 67% of sales in 2006. ^[1]

• Combines: are used to harvest various grain crops. AG's combines come with a variety of crop-harvesting heads for different kind of crops. Combines accounted for approximately 4% of sales in 2006. ^[2]

• Application Equipment: self-propelled 3 or 4 wheeled vehicles and equipment such as chemical sprayers which are used in the application of fertilizers and crop protection chemicals. Application equipment accounted for approximately 5% of sales in 2006. ^[3]

• Other Products: the company makes a wide range of other products such as mowers and tools used to cut hay. These products accounted for approximately 10% of sales in 2006. ^[4]

• Replacement Parts: in addition to new equipment, AG sells replacement parts for their products. These parts keep farm equipment in use, including products no longer in production. ^[5]

AGGO 2006 10K^[6]

Revenues in 2006 were $5,435M, a slight decrease from the $5,450M in 2005. The decrease was primarily attributable to significant sales declines in the North America (-20%) and Asia/Pacific regions (-22%), offset by 12% sales growth in EMEA (Europe, Middle East, and Africa). ^[7] The company's operating income declined primarily due to a goodwill impairment write down of $171.4 million related to its Sprayer division, which makes vehicles and equipment used in applying fertilizers and chemicals. Sales and profits of the company's Sprayer sales declined significantly in 2006 and were not projected to do as well the company had previously expected -- therefore the company wrote down the value of its sprayer business on its balance sheet. ^[8]

AGGO 2006 10K^[9]

EMEA is the company's largest geographic segment by sales, and it also holds the leading market share in the region. AG's second largest market is North America.

AGGO 2006 10K^[10]

Trends and Forces

Alternative Energy & Biofuels drive up Corn Prices

The USDA anticipates ethanol production to top 12 billion gallons annually by 2016, derived from over 4 billion bushels of corn. This would represent an increase of 168% from the estimated 1.6 billion bushels of corn used in ethanol production in 2005. This be accompanied by significantly higher corn prices, which would combine with the increased production to result in more revenue for farmers. Due to the increased demand for corn and higher prices, many farmers might use their increased income to make large investments such as purchasing new farm equipment like tractors and harvesters.

Emerging Markets Buy More Grain

AGCO is much more focused on emerging markets than peers such as Deere & Company (DE). The company generates over 75% of its revenue outside of the US, while Deere & Company (DE) generates only 30%. These countries are experiencing rapid economic development, which has fueled increased demand for food and energy. The interest in biofuels has extended beyond North America to emerging economies such as Brazil.

For example, AG's exposure to the Brazilian market (South America - mostly Brazil - accounts for 12% of AGCO’s 2006 revenues) could be a growth driver. Brazil makes ethanol from sugar cane, instead of corn. Currently, there are 47 new sugar cane mills being built in Brazil, and each one will require about 100 new tractors. AGCO has 60% market share in the Brazilian tractor market, and a dominant position in the sugarcane industry.

Market Share

While AGCO has leading market share for agricultural equipment in Europe, it has a much smaller position in North America, where it faces tough competition from the likes of Deere & Company (DE), New Holland, and Kubota. AGCO has 21% market share in Europe compared to 9% market share in North America.

Competition

AG faces tough competition from a variety of competitors across the globe, but its two primary competitors are Deere & Company (DE) and CNH Global N.V. (CNH).

* Deere & Company (DE): is the world's leading manufacturer of agricultural and forestry equipment, with over $22B in revenue for 2006. The company currently generates 70% of its sales from the US and Canada.

* CNH Global N.V. (CNH): CNH is a leading player in the agricultural equipment market and the construction equipment industries, from the Netherlands. CNH generates nearly 44% of sales in North America.

References

1. ↑ AG 2006 10K, Pg 2
2. ↑ AG 2006 10K, Pg 2
3. ↑ AG 2006 10K, Pg 3
4. ↑ AG 2006 10K, Pg 3
5. ↑ AG 2006 10K, Pg 3
6. ↑ AG 2006 10K, Pg 106
7. ↑ AG 2006 10K, Pg 25
8. ↑ AG 2006 10K, Pg 61
9. ↑ AG 2006 10K, Pg 53
10. ↑ AG 2006 10K, Pg 25
11. ↑ AG 2006 10K, Pg 53
12. ↑ DE 2006 10K, Pg14
13. ↑ CNH 2006 20F, Item 17