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Agco shares rise as cost cuts lift profits hopes

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Agco shares soared, after the tractor manufacturer raised its earnings forecast, amid signs of a belt-tightening campaign boosting profitability in the face of a tough sales environment.

The maker of Fendt and Massey Ferguson farm equipment nudged higher to $3.20 per share, from $3.10 per share, its full-year earnings forecast.

The raised guidance defied a worsened outlook for sales, with the group acknowledging the dent its results from depressed crop prices, and from the strength of the dollar, which cuts the value of contributions from foreign operations.

"Elevated crop production is pressuring grain prices and farm income, resulting in softer demand for farm equipment," the group said,

The weaker demand, "across all regions, and the unfavourable effect of foreign currency translation, are expected to continue to negatively impact Agco's sales and earnings for the remainder of 2015," the group said.

Wider margins

Agco deepened to 10%, from 5-10%, its forecast for the decline in industry farm equipment sales in North America this year, with the drop expected in South America revised up to 25%, from 20%.

And it reduced to $7.5bn-7.6bn, from $7.7bn-7.9bn, its forecast for its own sales in calendar 2015.

However, the dent from lower sales would be more than offset in profitability by a boost to margins thanks to cutbacks, evident in a reduction by $25m to $275m in capital investment this year.

"Benefits from the company's restructuring and other cost reduction initiatives and a lower tax rate are expected to partially offset the volume-related impacts," Agco said.

Rising returns

The comments came as Agco reported net sales of $1.7bn for the three months to September 30, down 19% from $2.2bn in the same period last year.

While sales in the Europe, Africa and Middle East region rose 4%, they fell in all other regions, with South America seeing the biggest drop, down 24%.

But earnings rose by 3.2% to $67.1m, equivalent to $0.77 a share, well ahead of the $0.50 a share forecast by investors.

The wider profit margins are the legacy of restructuring carried out in late 2014 and the first half of this year, during which Agco laid off around 1,950 employees around the world.

"Our third quarter was highlighted by focused operational performance with cost control and inventory management efforts helping to lessen the impacts of weak global industry demand and currency pressures," said Martin Richenhagen, Agco chairman and chief executive officer.

'Elevated production'

Mr Richenhagan downplayed the possibility of a quick end to the low crop prices that have hit farm machinery demand.

"With much of the strong U.S. harvest already in the grain bins, and with healthy crop production across Europe and South America, we are experiencing the third consecutive year of robust global harvests," he said.

"Elevated crop production is pressuring grain prices and farm income, resulting in softer demand for farm equipment."

'Declines in Brazil'

Mr Richenhagan noted particularly weak sales in South America.

"The lower sales were driven primarily by significant declines in Brazil due to weakness in the general economy, changes to the government financing program and softness in the sugar sector," he said.

"Longer term, we are optimistic about the fundamentals supporting commodity prices and farm income as well as healthy growth in our industry," Mr Richenhagan added.

Agco shares were up 7.8% at $47.89 in midday deals in New York.

By Agrimoney.com

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