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WIKI ANALYSIS
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.[1] The company earned $6.6 billion in revenue and $136 million in net income in 2009.[2]
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 three-quarters of its revenue generated outside of the U.S., AG has greater exposure to developing countries than any of its competitors.
Company Overview
AGCO primarily makes tractors, combines, and other agricultural equipment:[3][4]
- Tractors (66% of sales): 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).
- Combines (5% of sales): are used to harvest various grain crops. AG's combines come with a variety of crop-harvesting heads for different kind of crops.
- Application Equipment (4% of net sales): 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.
- Other Products (10% of net sales): the company makes a wide range of other products such as mowers and tools used to cut hay.
- Replacement Parts (14% of net sales): 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.
Business Growth
FY 2009 (ended December 31, 2009)[2]
- Net sales decreased 21% to $6.6 billion. The company attributes the decline to net sales decreases in most of its geographical regions as well as unfavorable foreign currency translation impacts
- Net income decreased 61% to $136 million.
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 around 15% of its revenues) could be a growth driver. Brazil makes ethanol from sugar cane, instead of corn. 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.
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. 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.
References
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