Fin 440

COMPANY ANALYSIS PROJECT. AGCO.

By: Ximena Albisu

April, 2008

TABLE OF CONTENTS
1.0 Introduction 1.1.1 Overview of AGCO Activities 1.2 Sector Analysis 1.3 Industry Analysis 2.1 Qualitative analysis of AGCO 3.1 Quantitative Analysis of AGCO 4.0 Conclusion and Recommendation

1.0 Introduction. Todays business environment is increasingly becoming more turbulent, chaotic and challenging than ever before and to survive, it is vital that a firm can do something better than its competitors ( Wonglimpiyarat 2004:1). Globalisation has not only altered the nature and the intensity of competition but has had to dictate and shape organisations in terms of what consumers wants, how and when they want it and what they are willing to pay for it (Hagan 1996:1).

Kanter on his work of Mastering Change argues that success in the present day business is not for those companies that re-engineer the way they do things, or for those fixing the past. According to Kanter (1995) such an action will not constitute an adequate response. This is so because success is based on an organisations ability to create, rather than predict the future by developing those products that will literally transform the way the world thinks and view it self and the needs (Kanter 1995:71).

Within the context of todays global competition, businesses and firms no-longer compete as individual companies but try to corporate with other businesses in their activities (Wu & Chien 2007:2). These researchers went further to argue that, this strategy has become quite common in many businesses including the retail clothing chain stores. The conventional vertical integrated company based business model is gradually being replaced by collaborative relationship between many fragmented, but complementary and specialized value stars and constellation (Wu & Chien:1).

An alternative approach towards organisational success, one which is becoming increasing prominent and has attracted the sustained attention of both domestic and international business scholars are core competences, capabilities and resources (e.g. Madhok 1998, Prahalad & Hamel1990, Hamel & Prahalad1994 ). In todays global business environment it is no longer sufficient simply to meet customers demand as time quality and cost have become increasingly important in the phase of increasing competition (Petts 1997:551).

According to Higgins (1998:2), customers dont always know what they need or even that there is a problem to be solved. Success awaits those companies that recognize the fact that, to be successful and satisfy customers, it is often necessary to lead customers into recognizing these needs (Higgins 1998:2-3).

1.1.1 PREFACE AGCO Corporation was founded in 1990 and is headquartered in Duluth, Georgia. It manufactures and distributes agricultural equipment and related replacement parts worldwide.

The company provides compact tractors, utility tractors, and high horsepower tractors used in farms and in specialty agricultural industries, such as dairies, landscaping, residential areas, livestock, orchards, and vineyards. It also offers combines; selfpropelled, three- and four-wheeled vehicles, and related equipment for use in the

application of liquid and dry fertilizers, and crop protection chemicals; chemical sprayer equipment; and related equipment, including vehicles used for waste application that are specifically designed for subsurface liquid injection and surface spreading of bio solids, such as sewage sludge and other farm or industrial waste.

AGCO Corporation's hay and forage equipment includes round and rectangular balers, self-propelled windrowers, disc mowers, spreaders, and mower conditioners for harvesting and packaging vegetative feeds used in the beef cattle, dairy, and horse industries; a range of implements, planters, and other equipment; tractor-pulled implements; other implements comprising disc harrows, heavy tillage, field cultivators, tractor-pulled planters, corn headers, and front loaders; and diesel engines, gears, and generating sets.

In addition, it offers precision farming technologies that enable farmers to gather information, such as yield data by utilizing satellite global positioning systems. The company, through its finance joint ventures with Cooperatieve Centrale RaiffeisenBoerenleenbank B.A., also provides retail financing.

It sells its products under various brand names, including: AGCO, Challenger, Fendt, Gleaner, Hesston, Massey Ferguson, RoGator, Spra-Coupe, Sunflower, Terra-Gator, Valtra, and Whitetm Planters. The company distributes its products through a network of independent dealers and distributors.

1.2 SECTOR Analysis The following factors will be considered under this section. We will consider the global economy as a whole, the domestic macro economy, demand and supply shocks, government policy and business cycles. Having said this, the study will now consider each of these factors more closely with respect to Singapore.

Bodie et al (2002) states that the international economic environment might affect a firms export prospects, the price competition it faces from competitors, or the profits it makes on investments abroad. Although economies are linked to each other in a global macro economy, there exist considerable differences in the economic performance across countries. (Bodie et al, 2002). It is therefore necessary for an investment or security analyst to consider these differences before providing investment advice. According to the IMF World Economic Outlook (2007), the global economy remains on track for continued robust growth in 2007, and 2007 although only at a moderate rate than in 2006. The 2007 outlook also reports that downside risk to the outlook seems less threatening that at the time of the September 2006 outlook. This is because oil price declines since last august and generally benign global financial conditions have helped to limit spillovers from the corrections in the US housing market and to contain inflation pressures. (IMF World Economic Outlook, 2007)

According to S+P 500 index, AGCO Corporation is classified to be in the Industrial Goods sector. In this sector, General Electric Co., Minnesota Mining & Manufacturing

Co., and Boeing Co. are among the largest components by market capitalization in this sector. Industries in the Index include aerospace and defense, building products, construction and engineering, electrical equipment, conglomerates, machinery,

commercial services and supplies, air freight and logistics, airlines, marine, road and rail, and transportation infrastructure companies.

1.3 Industry Analysis Like macroeconomic analysis the analysis of the industry is important because it enables the analysts to make abnormal profits arising from information asymmetry between the proper analyst and competitors who fail to carry out a proper analysis. Just as it is difficult for a firm to do well in a poor macroeconomic environment, so too is it difficult for a firm to perform well in a troubled industry. (Bodie et al, 2002). Similarly, as performance can vary across countries, so too does it varies across industries. (Bodie et al, 2002).

The agricultural industry is characterised by flat supplier prices. Demand in this sector continues to increase. However, AGCO is a company in the farm and construction industry. In this industry, Profitability depends heavily on technical expertise, availability of essential machineries, customer supports etc. In this industry, market leaders such as AGCO can compete with other small manufacturers as will be seen through an analysis of the industry using Porters competitive framework. In recent years, new competition in this industry has come from some chain stores and diversification of the activities in the industry into different sectors.

According to the companys website, the agricultural farm sector is undergoing change. More and more companies are moving into this industry with niche players getting increasingly competitive. Many companies manufacturing agricultural machineries are today increasingly worried about climate change. Companies like AGCO has taken the lead towards addressing environmental issues. At the same time, the number of niche players aimed at well-identified target groups continue to increase at an increasing rate.

Potential Entrance
(Low Threat) High capital requirement Goodwill

Buyers
Brand identity, Incentives,

(Higher loyalty)

Competitive Rivalry
Price war,location

(Bargaining power)

Suppliers

Substitutes
Propensity to substitute

(Unrelated)

Porters Five Forces Approach Relationship with suppliers

Bargaining power of buyers

Application to the Farm and Construction Industry The suppliers constitute independent contractors, government, iron and steel manufacturers, chemical companies ,local authorities farmers and other, participants Low switching cost due to numerous options available to buyers. Though there are numerous companies within the industry buyers switching cost turns to be high because of low bargaining power. 8

Threats of new entrants

Low threats of new entrants because of the human, time, material and financial resources necessary to set up a farm and construction machinery company. However, with China and India today growing into the world factory, a new entrant from these areas constitutes a big threat. Threats of substitutes products The industry is characterized with many niche players. or services Who, though their present activities might be seen as Rivalry firms amongst insignificant are gradually growing into key players established Fierce competition with flat cost. No major player able to dominate the market. However, with continuous innovation and design of new products, companies like Granite construction, AGCO, Deere & Company have taken the lead.

Figure: 2

Porter (1985:4) contends that the Five Forces define the rules of competition in any industry and at the same time marks the bases for understanding a companys success. Porter (1985) goes further and argues that, competitive strategy must grow out of a sophisticated understanding of the rules of competition that determine an industrys attractiveness. The researcher further claims that, The ultimate aim of competitive strategy is to cope with and, ideally, to change those rules in the firms behaviour. (1985: 4) and through their own strategy a firm can take hold of these five forces. Most farm and construction companies are struggling to make a name through product differentiation and integration with their customers and suppliers

At the most fundamental level, Porter (1985) contends that firms create competitive advantage by perceiving and discovering new and better ways to compete in an industry which is ultimately an act of innovation. In this regard Porter assumes that innovations

shift competitive advantage when rivals either fail to perceive the new way of competing or are unwilling or unable to respond. This is the situation of AGCO Corporation for example in which the company has shifted in to product differentiation and integration of suppliers and position through understanding of Porters five forces.

1.3.1

Threat of Potential Entrants

Porter in the five forces framework argue that, In an industry with high profit, and little capital for set up the threat of a new entrants turn to be high. But this is the opposite case, in the farm and construction industry where huge capital and technical expertise are needed, so it will be difficult to believe that in the short run another company could enter into the line of business and as such the threat of potential entrants turn to be low

1.3.2

Availability of Close Substitutes

In an industry where close substitute abound, competition turn to be intense because both switching cost for customers and suppliers turn to be low. In such an industry, buyers and suppliers have a high bargaining power. In this kind of market, Porter contends that competitive advantage could only be developed through cost leadership strategy. In the farm and construction industry, many niche players continue to develop other farm machines, however, because their activities are not significant this constitute a low threat.

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1.3.3

Suppliers Bargaining Power

Here, it is believed that where the suppliers have higher bargaining power, their switching cost from one partner to the other turns to be low and the reverse is true where suppliers have a low bargaining power. In the farm and construction industry, suppliers are chemical companies, iron and steel companies etc. Here, because of many key players within the industry suppliers switching cost turns to be low because they constitute a low bargaining power.

For a company operating in a market where suppliers have a high bargaining power, Porter in his five forces framework argues that, it will be difficult for a competitive advantage to be developed in the relationship, because suppliers switching cost will be low as they move from one market to the other

1.3.4

Buyers Bargaining Power

The number of buyers in the market, the proportion of the market controlled by a buyer and the availability of close substitutes determine buyers bargaining power. In an industry with few buyers and many substitute buyers bargaining power will be high and their switching cost low. The reverse is true in an opposite industry. 1.3.5 Competitive Rivalry

According to Porter, the above forces shape the competitiveness of an industry. This is so because in a market with so many rivals competition will be fierce as all market participants fight for common customers, suppliers and employees

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2.1 Qualitative Analysis of AGCO AGCO Corporation (AGCO) manufactures and distributes agricultural equipment and related replacement parts. AGCO sells a wide range of agricultural equipment.

Its products include tractors, combines, self-propelled sprayers, hay tools, forage equipment and implements, and a line of diesel engines (www.agco.com). According to Fournier (1998), brands are simply a collection of perceptions held in the minds of the consumers. Branding in consumers market has been widely argued to improve on a companys financial performance and long term competitive position 1. According to Keller (1993), powerful brands create meaningful images both in the minds of consumers and society as a whole. Elaborating on this, Aaker (1992) contends that, brand equity is a combination of assets such as loyalty, awareness, and perceived quality with brand associations.

With AGCO, its products are marketed under a number of brand names, including AGCO, Challenger, Fendt, Gleaner, Hesston, Massey Ferguson, RoGator, Spra-Coupe, Sunflower, Terra-Gator, Valtra and White Planters. AGCO distributes most of its products through a combination of approximately 3,000 independent dealers and distributors in more than 140 countries.

The company has diversified it activities into other areas as noted by the company brand equity. For example, the company provides retail financing in the United States, Canada,

Aaker , D. A.(1992) The value of brand equity, Journal of Business Strategy 13 (1992) (4), pp. 2732.

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Brazil, Germany, France, the United Kingdom, Australia, Ireland and Austria through its finance joint ventures with Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. (Rabobank). On September 10, 2007, the Company acquired Industria Agricola Fortaleza

AGCO remains one of the worlds largest manufacturers and distributor of agricultural equipments. The brands are sold in more than 140 countries in the world led by four of their global brands; multiple brands and global distribution strength are the keys to AGCOs growth strategy. Major market share positions in key agricultural markets of the world have been achieved through the company strong focus on customer service, leading edge technology and an independent dealer network of more than 3,200 full service dealers the largest distribution network in the industry (www.AGCO.com).

3.1Quantitative Analysis of AGCO In this section, the calculation and table for the various ratios (profitability, liquidity, and solvency) AGCO Inc will be presented. This will be calculated with figures drawn from the 2007 annual report.

3.1.1 AGCO Profitability Ratio

Ratio Gross Profit % Net Profit % ROCE ROE Formula Gross profit Sales x100% Net profit Sales x100% EBIT (shareholders funds + debt) Profit after Interest and tax x100 Shareholders equity 2007 1191 x100%=17.44% 6828.10 246.30 x100%=3.61% 6828.10 327.30 x100 =6.84% 4787.60 246.30 =9.51% 2043 2006 927.8 x100%=17.07% 5435 (64.90) x100%=(1.19)% 5435 (19.20) x100=(0.47)% 4114.50 (64.90) =(4.35)% 1493.60

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Earnings per share Price Earning Ratio NetAssets turnover Fixed Assets turnover

Net profit number of shares Stock price per share Earnings per share Revenue Total Assets Revenue Fixed Assets

246.30 =2.69 91.61 0.30 =0.11 2.69 6828.10=1.40 4870.60 6828.10=4.62 1476.40

(64.90) =(0.70) 91.81 0.50=0 (0.70) 5435=1.32 4114.50 5435=4.44 1223.90

The farm and construction industry is a backbone of any vibrant economy. The industry with it contracts nature has unique characteristics. According to Google finance, these characteristic makes the business risky, difficult to manage and vulnerable to bankruptcy. In addition, the business turns to be very sensitive to market cycles. In most situations, the market is largely affected by government economic and political policies such as taxes, interest rate etc.

Gross profit percentage measures what remains from sales after the company must have paid out the cost of goods sold expressed as a percentage. An increase in sales and a fall in the cost of goods sold will obviously increase gross profit percentage all things being equal. From our analysis, though AGCO made positive gross profit percentage for the two periods but the situation for 2007 when compared to 2006 is better. That is 17.4% in 2007 when compared to 17.05% in 2006. The ratio tells us that, despite a fall in total revenue received in the period of 2007 when compared to 2006, cost of goods sold also had a decrease.

According to Artrill &Elliot (2005), Net profit measures the amount of revenue outstanding after all the company related expenses for the period must have been paid. In other words, Net profit percentage finds out if the average markup on goods covers the

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expenses, and therefore results in a profit From the ratio, AGCO Inc again did better in 2007 when compared to 2006. The profit margin for 2007 is 3.61% as compared to (1.19) % in 2006. However, the figure of 2007 is in line with industry benchmark rating for this ratio.

The year 2007 is better than 2006. This is a sign of prosperity. What the management of AGCO Corporation Inc should do is try to reduce the costs associated with its other activities.

Return on capital employed measures the dollar earn by each dollar contributed by the capital of the organisation, while Return on equity measures the dollar earn by each dollar of shareholders fund. Capital will include all sources of funding. The company has again done better than industry benchmark figures for both ROCE and ROE. However, the fact that 2007 is better when compared to 2006 shows sign of improving trends.

3.1 .2 AGCO Liquidity Ratio

Ratio Current Ratio Formula 2007 2006

Current assets Current Liabilities Cash and short term Current liabilities Cash,equ and short term Investment Current Liabilities

2721.70 =1.31:1 2083.3 1348.40=0.64:1 2083.3 582.40=0.28:1 2083.3

2309 =1.42:1 1623.60 1078.20=0.66:1 1623.60 401.10=0.25:1 1623.60

Quick Ratio

Cash Ratio

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The current ratios have also witnessed a reduction when compared with 2006. The current ratio and quick ratio and cash ratio show that AGCO Corporation hasnt enough current assets to cover its short-term liabilities without facing business risk that is the risk that it might not meet its short-term commitments. The cash ratio for example shows that AGCO Inc could only cover 28% of its short-term liabilities in 2007 using cash ratio while in 2006 the company was able to cover 25%.Here, the company is doing better than the industry benchmark and consequently the competitors. However, what I will recommend here is for the company to try and tie the debtors collection period and creditors payment period to fall within the same payment band. Management needs to negotiate good sales terms for the company

According to Artrill and Elliot (2005), gearing is a general term describing a financial ratio that compares some form of owner's equity (or capital) to borrowed funds. Gearing is a measure of financial leverage, demonstrating the degree to which a firm's activities are funded by owner's funds versus creditor's funds. From the perspective of investopedia, the higher a company's degree of leverage, the more the company is considered risky. An acceptable level is determined by its comparison to ratios of companies in the same industry. The best known examples of gearing ratios include equity ratio (equity / assets), and debt ratio (total debt / total assets). The gearing ratio is higher when compared to the industry benchmark. P/E Ratio (ttm) PEG Ratio (ttm, 5 yr expected) LNN GEHL 61.01 4.11 27.39 1.34

Price/Sales (ttm):

0.89

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Price/Book (mrq):

2.97

As we can see AGCO has a P/E ratio much lower than the one of the industry leader, which gives us the indicator that this is not a very risky investment. Investors expect some growth from the firm but they do not expect a huge growth. The PEG ratio tells us that AGCO Corporation is more undervalued than the industry leader.

5.0 Conclusion Section A One year chart with the stocks 50 day and 200 day moving average and trading volume.

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One year chart with the stocks 50 day and 200 day moving average and trading volume and compared to Deere & CO.

According to these two charts we can see that AGCO has been growing lately, and that it is above the 50 days and 200 days average. We can also see that it has been doing better than Deer & Co in the past year.

Section B This study was initiated to carry out a market and industry analysis of AGCO Corporation Inc. I think the company was found to be doing well in some ratios when compared to the industry competitors and the benchmark. AGCO Inc analysis also shows that, to minimize the risk often associated with the farm and construction industry, the company has its own production unit and has diversify it activities.

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For suppliers and customers, the company has the best credit policies when compared to industry benchmark and other close competitors. Creditors are paid within 18days instead of the industry recommended benchmark of 35days. This is due to efficient working capital management when compared to competitors. By offering customers more flexibility in payment, more than the industry benchmark, new product of the company is easily penetrated in to the market.

After analyzing the companys financial situation, I would recommend for investors that already have shares to hold them, because this firm has been doing very good in the last year, and putting aside the possibility of a national recession, there is no strong indicator of selling. I would also recommend investors to go ahead and buy shares from this company, the fact that this company has been doing better that Deere & Co which is a huge company, is a good indicator that the company is still growing and gaining power. Also, I would recommend for people to buy stock from AGCO because during the game of Stock Trak I bought shares from them and I earned $13 in only two moths and a half.

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