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AGCO Corp (AGCO) Down Despite Q1 Earnings & Sales Beat

Shares of AGCO Corporation AGCO dropped 1.1% after the company reported a year-over-year plunge of over 74%  in its first-quarter 2016 adjusted earnings to 11 cents per share on Apr 27. However, earnings effortlessly beat the Zacks Consensus Estimate of 4 cents.

Including restructuring and other infrequent expenses, earnings in the quarter were 9 cents per share compared with 34 cents in the prior-year quarter.

AGCO reported revenues of $1.56 billion, a decrease of more than 8% from $1.70 billion in the year-ago quarter. Revenues, however, surpassed the Zacks Consensus Estimate of $1.45 billion.

AGCO’s first-quarter results reflect the impact of lower production to manage dealer and company inventory levels in advance of the spring selling season and cyclicality and seasonality of its industry. Moreover, continued weakness in global market conditions impacted revenues.

Operational Update

Cost of sales declined 8% to $1.24 billion from $1.35 billion in the year-ago quarter. Gross profit was $314.7 million in the quarter, down 9.5% from $347.9 million in the prior-year quarter. Gross margin was 20.2%, which reflects a year-over-year decline of 20 basis point (bps).

Selling, general and administrative expenses remained flat at $211 million. Segment income from operations decreased 26.4% year over year to $67 million. Consequently, operating margin contracted 150 bps to 4.3%.

Segment Performance

Sales at the North America segment fell 13.6% year over year to $408 million in the quarter. The segment posted a loss of $0.7 million compared to an operating income of $17.5 million in the year-ago quarter.

Sales at the South America segment plummeted 42.1% year over year to $144 million. The segment recorded an operating income of $0.4 million, a significant decline from $13 million in the year-ago quarter.

The EAME (Europe/ Africa/ Middle East) segment’s sales were $924 million, up 1.8% from the year-ago quarter. EAME’s operating income slipped to $70.3 million from $80.5 million in the prior-year quarter.

Sales at the Asia/Pacific segment increased 13% year over year to $82.6 million from $73 million a year ago. The segment reported a loss from operations of $2.9 million, narrower than the year-ago quarter loss of $12 million.

Financial Update

AGCO had cash and cash equivalents of $247.9 million at the end of first-quarter 2016 compared with $426.7 million at 2015 end. The company recorded cash used from operations of $348 million in the reported quarter as against cash usage of $286 million in the prior-year period.

The company’s total debt increased to $1.35 billion as of Mar 31, 2016, from $1.01 billion as of Dec 31, 2015. The debt-to-capitalization ratio was 31.5% as of Mar 31, 2016 compared with 26% at year-end 2015. AGCO also increased its quarterly dividend by 8% to 13 cents per share, effective first-quarter 2016.

Guidance

AGCO expects net sales for full-year 2016 to be around $7 billion. The company maintained its full-year earnings per share guidance of approximately $2.30. Weak industry demand for farm equipment across all regions is expected to negatively impact AGCO’s sales and earnings for 2016.

Gross and operating margins will be below 2015 levels due to the impact of lower sales and production volumes, a weaker sales mix and increased investment in product development expenses. However, benefits from cost-reduction initiatives will somewhat offset volume-related impacts.

In addition to diligent cost management, AGCO will focus on initiatives directed toward driving long-term benefits and raise the efficiency of its factories, improve service levels and strengthen product offering.

Zacks Rank

AGCO currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the industrial products sector include Titan International Inc. TWI, Altra Industrial Motion Corp. AIMC and Alarm.Com Holdings, Inc. ALRM. All these stocks carry a Zacks Rank #2 (Buy).

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