The Fair Value Report

AGCO Corporation

My Disclaimer
I am a value investor. I am not a licensed or registered investment professional. I currently have NO investment position in the company mentioned in this report. Financial statement data was obtained from the company’s most recent SEC 10-K filing.

Past and future gains contained herein are based on actual and anticipated earnings, actual and anticipated dividends, and actual and anticipated price appreciation. Valuations, while given as a specific amount, are always within a valuation range. Investors should be aware that any investment has the potential for loss, and past performance is no guarantee of future results.

The intent of this report is to provide the reader with a brief overview of my various company valuations so they can independently determine their current level of investment interest.

What They Do
AGCO Corporation is a manufacturer and distributor of agricultural equipment and related replacement parts, selling tractors, combines, self-propelled sprayers, hay tools, forage equipment, seeding and tillage, implements, and grain storage and protein production systems. Industry peers include Caterpillar (NYSE: CAT) and Deere and Company (NYSE: DE).

Recent Business Acquisitions
The company listed no new business acquisitions in its most recent SEC 10-K filing.

Recent Business Divestitures
The company listed no new business divestitures in its most recent SEC 10-K filing.

Subsequent Events
There were no subsequent events between the company’s fiscal year end and the filing of its most recent 10-K.

Short-Term Target
My current short-term target for the stock is $62.82 with an initial trailing stop set at $53.55. Based on a recent price of $54.37, upward price movement will find resistance at $55.85 and again at 57.56, with final resistance found at $61.22. Downward price movement will find support at $51.71 and again at $49.06, with final support found at $46.36.

Volatility Adjustment
There are different metrics available to help investors determine the volatility of a particular stock as compared to the volatility of the market as a whole. To me, the beta ratio is the metric that is the most representative of a stock’s volatility. A beta ratio of less than 1 means that the security’s price will be less volatile than the market, while a beta ratio greater than 1 indicates that the security’s price will be more volatile than the market. Basis my current beta ratio for this stock of 1.17, my volatility adjustment to recent pricing is $7 per share, making my current volatility adjusted price $48.

Quality of Earnings
A company’s earnings can be impacted by sources unrelated to the company’s day to day operations. These unrelated sources may distort a company’s operating income and consequently its fair value. Investors should always explore the sources of a company’s operating income to better understand potential valuation impacts.

Of the company’s $3.46 per share in pre-tax earnings, $0.00 per share came from sources unrelated to day to day operations, and of the company’s $5.86 per share in adjusted net income, $0.59 came from income taxes and/or minority interests.

Key Performance Indicator Rating
I use key performance indicators (KPIs) as a barometer to measure the effectiveness of management. Several of the metrics that I use are the tangible asset ratio, return on invested capital, free cash flow growth, earnings growth, debt growth, the dividend payout ratio, and the cash conversion cycle. Admittedly, my use of these and other metrics as a way to determine the effectiveness of management is subjective. Be that as it may, for me, they work. Based on a 0-105 scale, my KPI for this company is 55.

Five Year Growth of $10K
Had you invested $10K in this company five years ago (12/31/14), you would have received 221 shares of stock with a cost basis of $45.20 per share. Had you held the stock for five years and then closed your position (12/31/2019), you would have closed at $77.60 per share. During that holding period you would have collected $126 in regular and special dividends, and your initial $10K investment would have returned to you $17,168 a gain of 72% excluding regular and special dividends.

Annual Shareholder Return
I calculate annual shareholder return by subtracting the stock price at the close of business on the last day of a company’s fiscal year, from the stock price at the start of business on the first day of the company’s fiscal year, plus any dividends paid during that period, and then dividing the result by the opening stock price on the first day of a company’s fiscal year. For fiscal 2019, the company spent $1.72 per share buying back company stock and the annual shareholder return was 41%. Over the prior five year period, the company spent an average of $2.84 per share purchasing company stock, and the average annual shareholder return over the same period was 2%.

Cost of Common Equity
The cost of common equity is the minimum annual rate of return an investor should expect to earn when investing in shares of a particular company. I calculate this by adding the thirty-year treasury yield to the beta ratio for the stock multiplied by my default equity risk premium. My cost of common equity for this stock is 4.84%.

Insider Transactions
The SEC classifies insiders as “management, officers or any beneficial owners with more than 10% class of a company’s security.” Insiders are required to abide by certain rules and fill out SEC forms every time they buy or sell company shares. In addition, to prevent insider trading, or benefiting illegally from material non-public information that their positions give them access to, the law prevents insiders from deposing of shares within six months of their purchase. This effectively bars insiders from profiting from quick trades based on their “insider” knowledge.

Over the past 12 months, the company has recorded 134 insider trades involving 835,446 shares of stock. Of the total insider trades, 86 were Buys involving 462,468 shares of stock, and 48 were Sells involving 372,978 shares of stock, creating an insider buy to sell ratio of 1.2 to 1..

Enterprise and Equity Values
As a fair value investor, I am looking for companies that have low debt and generate lots of cash. To me, the easiest way to highlight a company’s ability to generate cash is to compare the Enterprise Value to the Equity Value, what I call my E2E Ratio. What I am looking for with this ratio is something close to or above 1, meaning the company generates cash at a rate equal to or faster than it generates debt. For this company my enterprise value (market cap plus debt less cash) is $68 and my equity value (market cap plus cash less debt) is $40, making my E2E Ratio, 0.59.

Risk/Reward Ratio
I determine my risk reward ratio by subtracting the current price from my terminate target and then dividing that result by my initiate target less a price fluctuation variable of 20%. What I am looking for with this ratio is a value of 5 or greater. My risk/reward ratio for this stock is 7.

Prior Average Valuations
My average valuation for the prior five year fiscal period was $60. The stock price during that time period averaged $55, earnings averaged $4.61 per share, and the average PE Ratio was 12. The current PE Ratio is 9.

Fair Value Investing
It is important to remember that the current fair market value of an equity is the price negotiated between a willing buyer and a willing seller. This fair market value is not the fair value of the associated company, but the negotiated value of a single equity trade.

To a fair value investor, consideration is given to a company’s overall financial condition including past and future earnings growth, free cash flow, both book and tangible book values, net current asset value, and many other valuation metrics in order to determine a fair value for the company as an on-going concern.

Accordingly, my most recent fair value estimate for this stock is $70. My worksheet target prices reflect this fair value estimate.

AGCO Corporation (NYSE: AGCO) – FYE 12/2019 – FAIRLY VALUED – The stock is currently trading at levels above my most recent $42 initiate target, but below my most recent $87 reduce target. Please See Linked PDF Worksheet.

There you are, short and, hopefully, to the point.

Revised on 07/06/2020