Back to the Trough - Adding AGCO
I need to sell Chart - GTLS - $198, which is being acquired by Baker-Hughes - BKR - $44. On a calm day maybe I should consider BKR for Halliburton - HAL - $22. I think BKR got GTLS at a great price. I could hold GTLS a little longer, but there is always some regulatory risk, so I will move on.
My decision is to replace GTLS with AGCO Corp. - AGCO - $115. AGCO is the #3 maker of farm equipment (behind Deere and CNH (Case and New Holland)).
I really did think about Entegris, Paccar, Nucor, WillScott, Scott’s Miracle-Gro, Stepan, Primo Brands, Americold, and McCormick.
In the end I did fall back on the long-term growth prospects of agriculture, and the unique story at AGCO. I know I already own Nutrien, Corteva, and Tyson, but not loving any other choice, I decided to live with another agriculture stock. Sorry if that lacks creativity, but it is not an easy time to find new ideas.
I think AGCO can earn $15.00/share and sells at 15x, so roughly a target of $225. AGCO is one of those unique cyclicals that can sell at a market multiple at the top of a cycle. AGCO is small enough, and has the technology aspects, that will allow investors to consider it a growth stock. This is a judgement call.
Here are my AGCO positives:
World population will grow from 8 billion to 10 billion over 10 years. As more move into the middle class, they will eat more protein. Each pound of chicken and beef consumed requires 5 to 10 pounds of grain as feed.
AGCO is about 50% Europe, 25% US/Canada, and 25% South America, so they are less a direct Deere competitor.
AGCO is calling out 2025 as their “trough” year, and they still plan to make $5/share and have positive cash flow. Thes results are much better than the 2016 prior trough year.
AGCO has done a great joint venture with Trimble - TRMB - $81 - in farm technology. I had watched Trimble for years because of their ag tech, but was disappointed when they sold half their farm tech to AGCO two years ago. The JV has done well. The key strategy is to allow farmers to retrofit any brand of tractor with the AGCO/Trimble tech platform.
At the very high end of the US market, AGCO’s Fendt brand can compete with Deere. The big farmers are less reliant on Deere’s superior dealer network.
The AGCO balance sheet is in good shape from some recent asset sales.
AGCO has great financial management and has just declared a large/new $1 billion stock buyback. A dispute with a large stock owner had prevented previous buybacks
AGCO is owned by both the T Rowe Price Mid-Cap Value Fund and the Victory Sycamore Value Fund. My old friends, and great ag investors, Principal Financial (good Des Moines guys) have a big position, and the Norwegian Sovereign Wealth Fund has jumped in.
Others:
Deere - DE - $488 - just too tough to grow a $130 billion market cap monster
CNH Industrial - CNH - $12 - maybe a value stock for a reason, slow moving management
Lindsay - LNN - $144 - too tied to South America, but a solid idea
Valmomt - VMI - $377 - the other irrigation player, doing too well in electrical power
Alamo Group - ALG - $219 - mainly grass cutting equipment
I appreciate the detailed breakown on why you chose AGCO over the other cyclicals you were considering. The international exposre mix is really what sets them apart from Deere, especially with Brazil likely to continue growing as a major ag producer. The timing is interesting too since calling 2025 the trough year means you're getting in at what could be the bottom. That Trimble JV for precision ag retrofits is a smart move since it allows them to capture share without needing farmers to replace their entrie fleets. The $1B buyback also shows management confidence at these levels.
Your world population growth is way off. World population is 8.1B. Expected to grow to 8.9B in next 20 years. Your estimated CAGR is triple what most experts predict. World population is growing <1% per year.