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We have been working on AGCO as our next memo based on similar themes to those of the investment case on Titan Machinery (pent-up demand for agricultural machinery), but with the record Q1 results just announced before the market opened (https://investors.agcocorp.com/news-releases/news-release-details/agco-reports-first-quarter-results-16), we wanted to post this now as Idea for Research as we complete our diligence and memo.
AGCO is a manufacturer of farm equipment such as tractors and combines under core brands of Fendt, Massey Ferguson and Challenger. Our interest in this business was initially piqued through the opportunity presented by Titan who are dealers for CNH Industrial. When reviewing the competition and peer group for Titan we were struck but the valuation differential between AGCO and market leader Deere & Co, who broadly dominate the US market. On consensus estimates for FY 23E, AGCO trades at 6.4x EBIT, while Deere trades 12.7x i.e. almost twice the multiple. While Deere is a $160bn EV behemoth compared to AGCO’s much more modest $10.5bn EV, this level of multiple difference didn’t seem reasonable and our diligence to date appears to be confirming this.
The 2 key drivers of our emerging investment thesis are AGCO’s drive to expand the Fendt brand globally, including taking market share from Deere in the US and its Precision Planting business. Deere are considered the industry gold standard, but Fendt s a German high-end brand that is popular in Europe and is competitive on quality and are aiming to take advantage of supply chain constraints that have meant that everyone wanting a Deere have had to look elsewhere given lead times. Precision planting focuses on developing smart products that improve planting, liquid application and harvest operations on farms and this business is a leader in the field.
Our memo on AGCO is due to be the next published with additional detail, but given the relatively low valuation and the results announced today we thought it was worth highlighting this early. Our preliminary valuation is based on 10x EBIT (still a reasonable discount to Deere), leading to a preliminary Thesis Price north of $180
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