Strong Fundamental Case Emerging for AGCO; Morgan Stanley Revised Target Price to $122

Morgan Stanley raised their stock price forecast on AGCO to $122 from $195, assigning an “Overweight” rating and said they see a strong fundamental case emerging for the agricultural equipment manufacturer as top-line acceleration is complemented by upside to margin estimates and an attractive valuation paradigm.

The industrial products company reported an EPS of $2.09 per share in the third quarter, way above the market consensus estimate of $0.97 per share. That was the third time AGCO had surpassed the Wall Street consensus estimates over the last four quarters.

“We expect AGCO’s revenue growth to accelerate in 2021 on the back of accelerating industry demand trends in both North America and Europe. Tangible progress towards AGCO’s 10% margin target is also underappreciated and not embedded in consensus numbers. We are raising our FY21/FY22 EPS estimates by 10-12% on the back of these dynamics. Our FY21/22 operating margin estimates are 60-70bps above consensus and our FY21/22 EPS stand 10% above consensus for both years. Further, AGCO screens favourably on a relative basis vs. both the market multiple and Ag Equipment peers,” noted Courtney Yakavonis, equity analyst at Morgan Stanley.

“As positive revisions begin to materialize in 2021, we expect the valuation gap to the market to close. Our $122 price target is based on 16.2x FY22 EPS, which represents a 20% discount to our equity strategy team’s target market multiple of 20.25x. AGCO also currently trades at a 20% discount to DE vs. its historical discount of 0%, but our price target still embeds similar discount vs. our Deere & Co. (DE) target multiple, presenting upside to our base case valuation if the gap to DE converges,” Yakavonis added.

Morgan Stanley gave a target price of $165 under a bull-case scenario and $54 under the worst-case scenario. Other equity analysts also recently updated their stock outlook. AGCO had its price objective boosted by Credit Suisse Group to $89 from $79. Credit Suisse Group currently has a neutral rating on the industrial products company’s stock. Barclays raised to an equal weight rating from an underweight and lifted their stock price forecast to $92 from $58.

In addition, BMO Capital Markets lifted their price objective to $110 from $90 and gave the company an outperform rating. Deutsche Bank raised their target price to $92 from $78 and gave the company a hold rating. At last, JP Morgan upped to an overweight rating from a neutral rating and set a $97 price objective.

Thirteen analysts forecast the average price in 12 months at $100.50 with a high forecast of $114.00 and a low forecast of $89.00. The average price target represents a 12.87% increase from the last price of $89.04. From those 13 analysts, nine rated “Buy”, four rated “Hold” and none rated “Sell”, according to Tipranks.

AGCO’s shares closed 0.70% lower at $89.04 on Monday. However, the stock is up over 15% so far this year.

“As a pure-play on ag equipment, AGCO has exposure to broad-based swings in grain prices, as well as the North American replacement cycle, though less so than peers. Ag Equipment remains our favourite Machinery end market for 2021, with double-digit end-market growth across both NA and EU Ag Equipment – AGCO remains the purest play on this theme,” Morgan Stanley’s Yakavonis added.

“We remain optimistic on share gains associated with recent efforts to standardize equipment across geographies, with the company’s IDEAL Combine roll out also likely to result in tangible share gains. We are increasingly seeing evidence of more sustained margin improvement and top-line outperformance vs. AGCO’s primary end markets,”