An Insider Sees Growth in This Ag Stock

 | Mar 28, 2013 | 12:37 PM EDT  | Comments
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 A Form 4 filed with the Securities and Exchange Commission has reported that Tractors and Farm Equipment Limited purchased close to 270,000 shares of AGCO (AGCO), a $4.9 billion market cap agricultural equipment company, on March 25 at prices of about $51 per share.

Tractors and Farm Equipment Limited has ties to AGCO board member Mallika Srinivasan, and so this transaction had to be reported as an insider purchase. The company now owns 3.5 million shares of AGCO stock. Our database of insider trading filings shows that similar purchases had been occurring during November and early December 2012 in the mid-$40s. There had been a three-month break before, however, before Tractors and Farm Equipment Limited started buying again this month.

We track insider purchases because studies show that they are often bullish signals. Our explanation for this finding is that since it is normally rational for insiders to diversify rather than accumulating company-specific risk, the purchases indicate that they are confident in the stock price .AGCO has been growing nicely the past few years following a severe hit to its business from 2008 to 2009. Last year revenue increased 14% compared to 2011. The four-year compound annual growth rate, however, was a more modest 5% as that includes the poor 2009 results. In addition, the 2012 numbers were boosted by acquisitions, particularly in North America. Earnings tell a similar story over the long term, though margins have increased in the last several years.

While AGCO's net income did fall in 2012, according to its 10-K, this was more than 100% explained by a lower tax rate in the year before (in other words, pretax income actually increased). Even the growth in pretax income was understated as the company reported an impairment charge. If we add that item, we get an 11% increase in earnings before taxes.

On a geographic basis, AGCO does most of its sales in Europe, the Middle East and Africa (EMEA). With its North American acquisitions, that has become its second-largest geographic unit with 26% of sales for 2012 (it also appears that North America, even leaving out the effects of the acquisition, is a growth market for the company in contrast to very weak ex-acquisition growth in EMEA).

Some longer-term investors believe that agriculture offers attractive long-term growth opportunities as the world population continues to grow and also becomes richer.This would be expected to increase demand for more agriculturally intensive meat products. Current market conditions, however, are pricing AGCO at a fairly cheap valuation. It trades at 10x trailing earnings, suggesting that it might be undervalued if it can grow its earnings over the medium to long term at even a modest rate. Wall Street analysts are bullish on the company, with their estimates implying a forward price-to-earnings (P/E) ratio of 9 and a five-year price-to-earnings-to-growth (P/E/G) ratio of 0.8.

There are a couple of notable risks for AGCO. We have the integration risk which comes with being such an acquisitive company. While these acquisitions do offer AGCO an upside (particularly as it is making its largest acquisitions in North America, a market seeing strong secular growth) they could threaten operational efficiency. In addition, as implied earlier by the discussion of the steep decline in business from 2008 to 2009 the company has considerable macro exposure at a beta of 2.1.

Tractors and Farm Equipment Limited has been quite active in buying shares of the company, and normally insider purchases such as this are a positive sign. While AGCO is actually priced about in line with peers such as Deere (DE) (whose trailing profit/earnings ratio is 11), it looks as if investors may be underestimating the chances of the business continuing to grow its earnings. We think that the stock is a least potentially a good value. 

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