On a year-over-year basis, both AGCO and CNH reported pretty good numbers in their third-quarter earnings announcements. But the two ag equipment manufacturers presented highly divergent outlooks for the fourth quarter and all of 2012.
AGCO, with more of its sales centered on livestock, dairy and poultry producers that were slammed by the drought, scaled back its sales and profit forecasts for the full year, as its third quarter results came in lower than expected. These producers had little or no protection from the rising feed and other costs associated with the 2012 drought. The company is also more exposed to the European market, where sales have been sluggish at best, than its major competitors.
For the quarter, AGCO reported earnings of $94.5 million, up from a profit of $84.4 million a year earlier. Total sales rose 9.3% to $2.29 billion. This was slightly below analysts’ sales expectations of $2.3 billion. The company also lowered its overall 2012 revenue outlook to $9.8-$10 billion from its earlier forecast of $10.1-$10.3 billion.
On the other hand, CNH’s customer base is largely row-crop farmers, most of whom were afforded pricing protection through crop insurance. CNH reported a third-quarter profit of $323 million compared with $274 million a year earlier. Net sales climbed 4.8% to $4.83 billion. Farm equipment sales rose 12% to $4 billion, while sales of CNH’s construction machinery dropped 21% to $830 million. Analysts expected revenues of $4.57 billion.
CNH also maintained its forecast calling for 5% revenue growth for 2012.
Several analysts commented that AGCO’s GSI subsidiary was one reason the company didn’t meet expectations, and probably led to the company lowering its revenue guidance for the remainder of the year.
AGCO acquired GSI last year for $930 million to expand the company’s ag business into grain storage and other equipment for livestock and poultry production.
In a conference call with analysts, Andrew Beck, AGCO’s chief financial officer, says “The higher prices are obviously affecting protein producers at this time. So, as we look at the balance of the year, we see it is relatively weak.”
As for its performance so far this year, it’s believed the rising commodity prices actually held back sales of grain storage equipment, which makes up nearly two-thirds of GSI’s sales, as farmers chose to sell their crops rather than store them.
Ann Duignan, machinery analyst for JP Morgan, notes another headwind for AGCO is the falloff in European business.
“For AGCO, order boards at quarter-end were down 30% in the EU (2011 was at a record level), more modestly in North America (for high horsepower tractors and combines) and flat in South America. The fourth-quarter outlook includes flattish production but weaker margins in North America due to GSI.”
UBS analyst Eric Crawford says in a note that slower than expected start up of new Fendt tractor facilities in Germany will also play a role in AGCO performance this year and next.
“The guidance reduction was disappointing, and the lower orders and GSI impact may be a headwind into 2013 earnings. However, the impact of the slower Fendt ramp up may become a 2013 tailwind, and cash flow is expected to be strong in the fourth quarter ($400m+). Bottom line, we still think earnings could grow next year, assuming solid North American farm income trends, Fendt ramp up, and other operational improvements.”
In addition to maintaining its guidance calling for a 5% growth in 2012 revenues, CNH sees 2012 operating margins “in excess of” 8.6%. “With year-to-date sales of +9.1% year-over-year and continued strength in ag equipment results, we suspect CNH guidance may be conservative,” says Crawford.
Part of CNH’s conservative approach is based on its planned production cutbacks of farm machinery in the fourth quarter to below retail sales volumes to reduce inventories.
In a note to investors, Duignan says, “Dealer inventories in ag equipment have risen above where management would like, and as a result the company intends to under-produce retail sales in the fourth quarter. CNH is likely to deliver sales below industry growth rates.
“That said, the company is outperforming competitors in global combine sales. With lower production, we anticipate under-absorption and thus weaker operating margins; management agreed that lower production would result in margin compression,” says Duignan.
“Management also noted that it is difficult to predict 2013 North American ag equipment demand as 2012 was such an unusual year. We believe that with less grain to sell the first half of 2013, farmers will likely be hesitant. Demand may accelerate in the second half, should yields revert to trend.”
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