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Agricultural Leader: Analyzing AGCO's Earnings in 2Q16

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Part 4
Agricultural Leader: Analyzing AGCO's Earnings in 2Q16 PART 4 OF 5

Why Did AGCO Increase Its Fiscal 2016 Sales Guidance?

AGCO’s free cash flows

AGCO’s (AGCO) year-to-date free cash flows have been negative—the company’s working capital requirements are greater in the first half of the year. The free cash flow figure is calculated by deducting capital expenditure from operating cash flows. AGCO’s free cash flow in 1H16 was -$137 million—compared to 1H15 free cash flows of -$73 million. AGCO has guided fiscal 2016 free cash flows of $150 million–$175 million. This is much lower than fiscal 2015 free cash flows of $313 million.

Why Did AGCO Increase Its Fiscal 2016 Sales Guidance?

Why Did AGCO Increase Its Fiscal 2016 Sales Guidance?

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AGCO’s fiscal 2016 guidance

AGCO raised its fiscal 2016 sales guidance by $200 million to $7.2 billion despite projecting marginally lower production hours in 3Q16 and 4Q16. The company expects its business to strengthen in South America where it’s an industry leader. It has a market share of ~50%. Since the fourth quarter is a weak one for Cimbria, AGCO doesn’t expect any significant contribution from it after the transaction is completed in the third quarter.

The company maintained its $2.30 adjusted EPS (earnings per share) guidance for fiscal 2016. The company earned $1.12 in 1H16. It expects a significant portion of the ramp-up in adjusted EPS to come from the North American and South American regions. The company expects its tax rates in the 32%–34% range compared to previous guidance of 30%–32%. As a result of its previous guidance, it couldn’t upgrade its adjusted sales guidance despite a forward revision in the sales forecast.

Key ETF’s

Investors interested in trading in agribusinesses could look into the PowerShares DB Agriculture Fund ETF (DBA). Those interested in trading in dividend-based ETFs might look into the Vanguard Dividend Appreciation ETF (VIG). Major holdings in VIG include Johnson & Johnson (JNJ), with a holding of 4.3%, and McDonald’s (MCD), with a holding of 2.8%

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