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Agco backs rival CNH on strong South America market prospects

South America's tractor market is to revive this year, bucking the trend of a world mired in "market difficulties", Agco said, as the ag machinery maker unveiled better-than-expected results and forecast some further profits growth.

Agco, the maker of Massey Ferguson and Fendt machinery, forecast industry tractor sales, by vehicle, in South America rising 10% in 2017, after a 6% drop in 2016.

The forecast contrasted with expectations of at best a flat market in Europe, and an estimate of a further, 5-10% drop in industry volumes in North America.

And it tallied with a forecast from rival CNH Industrial, which last week forecast rise of about a 15% in industry tractor sales in Latin America this year, with similar growth expected for the combines market.

Back in the black

Martin Richenhagen, the Agco chief executive, said that, as regards global ag machinery prospects for this year, "industry conditions are expected to remain near the bottom of the cycle… in key markets".

However, while Agco forecast "softer industry demand across North America and Europe" in 2017, this would be "partially offset by growth in South America", where the group had already itself seen a recovery in its own fortunes.

Agco's South American operation returned to an operating profit of $13.6m for the October-to-December quarter, from an operating loss of $4.4m a year before, on revenues of $308.1m – up 64% in dollar terms, or 9.7% excluding currency moves.

'Improving political landscape'

Mr Richenhagen flagged the boost to the market from "the improving political landscape in Brazil", where the impeachment of former president Dilma Rousseff has led to the implementation of a more pro-business agenda, under her successor Michel Temer.

Signally, Moody's data last week showed net investment flows into Brazilian funds totalling R$109.1bn last year, a six-year high, and compared with figures of R$2bn for 2015 and R$1bn for 2014.

Central bank data show a buoyant close to 2016 for foreign direct investment in Brazil, with the total for December hitting a record high for that month of $15.4bn, taking the total for 2016 to $78.9bn, a rise of 6% year on year.

In Argentina, Mr Richenhagen flagged the market boost from "supportive government policies and improved crop production", with cuts to crop export taxes and restrictions implemented by the government of Mauricio Macri seen as a big boost to prospects.

Earnings forecast

Agco reported overall earnings for the October-to-December quarter flat at $61.2m, with the impact of a 6.9% rise to $2.09bn in sales offset in part by higher engineering costs and larger tax payments.

However, underlying earnings, at the equivalent of $0.84 per share, beat market expectations by $0.13 per share.

"Despite… difficult conditions, our solid operational execution during 2016 allowed us to exceed our financial targets and be well-positioned to seek new opportunities for growth," Mr Richenhagen said.

However, the group was cautious in its forecast for earnings for 2017, seeing earnings per share reaching $2.50, only marginally higher than the underlying $2.47-per-share result achieved last year.

Agco shares stood $0.02 higher at $63.13 in lunchtime deals in New York.

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