Tractors and Farm Equipment Limited, a company managed by Mallika Srinivasan, has filed with the SEC to declare that it purchased about 61,000 shares of farm equipment manufacturer AGCO Corporation (NYSE:AGCO) at an average price of $44.24. Srinivasan is a Board member of AGCO and owns a small number of shares herself, and so as a company insider was required to notify investors of her company’s purchase. Insider buying at AGCO had also occurred in mid-May. See a history of insider purchases at the company.
Srinivasan isn’t alone in being bullish on the company. Billionaire Ray Dalio’s Bridgewater Associates, one of the largest hedge funds in the world, owned about 420,000 shares of the stock at the end of June of this year, up from a very small position at the beginning of the second quarter (see more investment activity at Bridgewater). However, as of that filing Bridgewater only had about $19 million invested in AGCO. The only fund in our database of 13F filings which owned over $20 million worth of stock in the $4.3 billion market cap company was First Pacific Advisors, managed by Robert Rodriguez and Steven Romick; it owned about 990,000 shares, a 46% increase from the beginning of April.
In the second quarter, AGCO Corporation increased its sales by 14% compared to the same period a year earlier. These results drove an increase of about 50% in net income, leading the company to report $2.08 in earnings per share versus $1.38 a year ago. The first quarter was even stronger, and so over the first half of 2012 sales rose 19% and net income grew more than 50%. It is possible that some of these gains were due to mild winter weather in the U.S. that pushed demand for farm equipment earlier in the year (North American operations primarily drove revenue gains, with sales in the region rising 72% in the first half of the year compared to the first half of 2011). However, even now North America is only responsible for about a quarter of the company’s business and its leading market, EMEA, also saw growth in its revenue and operating income.
Based on its historical results and Wall Street expectations, AGCO Corporation is a great value. The trailing P/E multiple is only 6, and though the sell-side expects a stagnant business next year, moderate earnings growth over the next several years implies a five-year PEG ratio of 0.6. On a macro level many investors are starting to look at natural resources, including farm products, as good investments as a growing world population bumps up against resource constraints. It is likely that farm equipment manufacturers such as AGCO and Deere & Company (NYSE:DE) would capitalize on this trend as well.
AGCO should be compared to manufacturers and retailers of farm equipment, including Deere, CNH Global NV (NYSE:CNH), and Tractor Supply Company (NASDAQ:TSCO). Deere and CNH, the manufacturers, trade at similarly low earnings multiples to AGCO’s: their trailing multiples are 11 and 10, respectively. With their market capitalizations coming in at $31 and $10 billion against AGCO’s $4 billion, they likely deserve slightly higher multiples on historical earnings assuming that their growth outlooks are similar. CNH’s growth has been quite rapid recently- 20% revenue growth and 77% earnings growth last quarter compared to the same period in the previous year- and Deere’s has been slow but steady at about 10% for both figures. They both trade at 9 times forward earnings estimates, again higher than AGCO. Tractor Supply is priced much more for growth, at a trailing P/E of 28 and a forward P/E of 23, and we think the manufacturers are better buys. Fertilizer provider Potash Corp of Saskatchewan, Inc. (NYSE:POT) would be another way to invest in growth in agriculture; it actually saw a drop in earnings last quarter compared to the same period in 2011 and carries a trailing P/E of 15. Again, the manufacturers seem to be better values. Given the similar valuations we might prefer taking market leader Deere at the slightly higher earnings multiple and picking up a moderate dividend yield of 2.4% in the bargain.