UBS Cuts AGCO to Sell, Sees '16 Guidance Disappointing

• AGCO Corporation AGCO shares are up 2 percent year-to-date, despite the sharp decline in August from $57.87 to $46.29.
• UBS analyst Steven Fisher downgraded the rating on the company from Neutral to Sell, while reducing the price target from $52 to $39.
• Fisher believes that the likelihood of a decline in the company’s earnings in 2016, due to weaker NA prices and a weakening SA market, is not reflected either in the consensus estimates or the stock.

Analyst Steven Fisher said that AGCO’s earnings could decline again in 2016 due to lower corn, soybean and cattle prices in North American as well as a weakening South American market. The likelihood of these headwinds is, however, not reflected either in the consensus estimates or the stock.

“We also see risk of lower machinery prices in 2016. While Europe is AGCO's largest market, we expect flattish revenues and profits, but with a downward bias, due to lower dairy prices and ongoing macro headwinds,” Fisher wrote.

The EPS estimate for 2016 has been reduced from $3.20 to $2.60, to reflect the expectation of lower volumes and pricing. Fisher mentioned that the estimate assumes a 10 percent decline in both NA and SA and a flat market in Europe.

The analyst added that a broad based 1 percent price headwind could result in a 20 percent decline in EPS. The EPS estimate for 2017 has also been reduced from $3.65 to $3, to reflect a lower base year.

In the report UBS noted, “We think AGCO has done a good job of improving manufacturing productivity, procurement, and cost structure in 2015…However, we think AGCO has likely harvested the low hanging fruit, and we think further cost reductions will likely be harder and more costly to achieve.”

Fisher believes that the volume declines next year would have “a more direct negative impact” on the company’s profitability, especially in the NA market.