(By Michael Vodicka) Legendary investor Jim Rodgers is seriously bullish on agriculture. He is the guy who famously said farmers are going to be driving Ferraris in twenty years. His theory is that a growing global population will continue to pressure limited food and agricultural resources, sending prices sharply higher and making a lot of people rich in the process.
If that turns out to be true and farmers are sitting on piles of cash, a lot of that money will be reinvested in the business in the form of capital spending. Farmers with lots of discretionary income sitting on the sidelines will definitely be looking to pick up a few fancy new tractors. That would make AGCO, Inc. (AGCO) a great way to play that bullish trend in agriculture.
Although the company offers a full product line of farm equipment and supplies, it specializes in small and medium sized tractors. AGCO also has a strong international presence, servicing markets in North America, South America, Eastern and Western Europe and Asia/Pacific.
With a market cap of $3.9 billion, AGCO is a mid cap and much smaller than its peers like Deere & Co (DE) at $30 billion and CNH Global (CNH) at $9.5 billion. You might also consider Caterpillar, Inc. (CAT) at $58 billion, but overall this space is not super crowded.
AGCO was actually having a decent year up until late April, when shares basically collapsed with the market, falling from $54 to a recent low just above $38. The decline didn't come on any bad news, in fact, it came on good news, with the company's strong Q1 results from early May coming in ahead of expectations.
Sales were up 27% from last year to $2.3 billion. Earnings looked even better, coming in at $1.21, 41% ahead of expectations, lifting the company's average earnings surprise to 21% over the last four quarters.
CEO Martin Richenhagen spoke of the strong trend driving the company's business, saying "The growing population and the shift to higher protein diets are driving increases in the consumption of food and long-term demand for grain. Currently, inventories of grain remain at historically low levels on a stocks-to-use basis."
The strong Q2 results showcased the company's strong momentum in spite of uncertainty about the global economy and particularly instability in Europe. But higher grain prices and surging demand from emerging markets has kept AGCO chugging along.