AGCO (US:AGCO) Seeking Alphaยท2024-08-13 15:15Core Viewpoint - AGCO Corporation is currently at the trough of its business cycle, with expectations for a recovery in agricultural equipment demand by FY25, contingent on macroeconomic improvements [2][5][7] Financial Performance - In Q2 2024, AGCO reported an adjusted EPS of $2.53, below consensus estimates of $2.91, with net sales declining 15% year-over-year to $3.25 billion, missing the consensus estimate of $3.5 billion [3] - Sales in South America dropped approximately 40%, particularly in Brazil, due to adverse weather and funding issues, while European sales decreased by 5% and North American sales fell by 18% [3] - The adjusted EBIT margin decreased to 10.3% from 13.1% in Q2 2023, prompting management to lower FY24 guidance for net sales to $12.5 billion, an expected decline of 13.3% year-over-year [3][4] Market Dynamics - The agricultural equipment market is expected to grow due to increasing global population and demand for agricultural products, despite current weak demand attributed to high inflation and poor consumer spending [4][7] - AGCO has cut global production by 23% in Q2 2024, with a significant 57% reduction in South America, and anticipates further cuts in H2 2024 [4] Future Outlook - The anticipated recovery in agricultural product demand is linked to potential interest rate cuts, easing inflation, and improvements in the labor market and housing situation [5][7] - AGCO's forward PE multiple has increased to 11x, indicating market expectations for a recovery, with a target share price of $140 based on projected FY26 earnings [5] Conclusion - Despite recent poor performance, AGCO maintains a buy rating due to the belief that the company is positioned for a future upcycle as macroeconomic conditions improve [7]