For defensive investors and those who are looking for a defensive stock to add to their portfolios, AGCO (NYSE:AGCO) stock looks like an intriguing name. The company, which sells agricultural equipment, is growing fairly rapidly and its revenue has consistently risen through the years, yet it has a very attractive valuation.
Moreover, the shares are likely to quickly recover from a recession, but the company is highly leveraged to the global advanced agricultural market, which is likely to keep expanding at a fairly fast rate going forward. Finally, I think there’s a good chance that the dividend yield of AGCO stock will increase in the near future.
Rapid Consistent Growth With A Very Attractive Valuation
From 2017 through 2020, AGCO’s top line increased every year except 2019, when it was likely negatively impacted by the trade war between the U.S. and China.
In the 12 months that ended in September, AGCO’s sales came in at $10.7 billion, versus $9.15 billion in 2020. In the third quarter, its sales climbed 8% year-over-year to $2.75 billion and in the second quarter, its revenue jumped over 40% year-over-year to $2.88 billion.
AGCO’s profits have also consistently risen, as its operating income increased in every year between 2017 and 2020, reaching $632 million in 2020. Last quarter, its operating income increased to $254.3 million from $223.5 million during the same period a year earlier.
As far as valuation, AGCO stock is trading at a forward price-earnings ratio of just 11.5. That’s well below the S&P 500’s average P/E ratio of 29.
Defensive Yet Leveraged to a High-Growth Sector
AGCO stock is defensive, since every person needs food to survive, and farmers the world over utilize AGCO’s farm equipment. Providing evidence of its defensiveness, AGCO stock has generally risen every year since the Great Recession.
Moreover, nearly every sizeable pullback in the shares since the financial crisis has proven to be a good buying opportunity. Illustrating that point, during the market’s downturn caused by the onset of the coronavirus pandemic, AGCO’s shares fell about 30% from peak to trough and subsequently nearly tripled over the next year.
Worth noting is that the shares are now nearly 30% below their 52-week high of $158.
Additionally, AGCO is in a very high-growth sector. Food prices have generally been climbing meaningfully globally, and many developing countries are greatly increasing their usage of mechanized agricultural equipment.
Illustrating the latter point, AGCO’s chief executive officer, Eric Hansotia, reported in late October that, “Operating margins in our South America region reached 11.6% in the third quarter, and operating income improved nearly $28 million from the same period in 2020,” while “Protein production sales grew approximately 16% in 2021, with the strongest growth in the Asia Pacific, Africa and South American regions.”
And, perhaps surprisingly, AGCO is also benefitting from the tech revolution. Through September, the company’s “precision ag sales” jumped 33% YOY, Hansotia reported.
And AGCO is using investments to further increase its technological edge. For example, it noted that it recently made a “2.9% equity investment in Greeneye Technology, an emerging leader in precision spraying technology.” The company also “made a 2.53% equity investment in Apex.AI, an emerging leader in safety-certified software for mobility and driverless vehicles,” according to Seeking Alpha.
The Supply Chain and Dividend Hikes for AGCO Stock
AGCO has experienced “a very challenging supply chain environment,” Hansotia reported at the end of October. As a result, AGCO lowered its fourth-quarter guidance, he noted. But on Nov. 21, The Wall Street Journal reported that, “Global supply-chain woes are beginning to recede,” adding that executives anticipate that the situation will become “more normal” in 2022.
At this point, AGCO’s dividend yield is only 0.73%. But I think that, as the supply chain situation becomes more settled, and the company’s profitability continues to climb and potentially accelerate, the company may meaningfully increase its dividend.
The Bottom Line on AGCO Stock
Operating in a favorable sector and consistently growing its revenue and profits, AGCO looks poised to continue performing very well going forward.
What’s more, the company is effectively exploiting technology, while the valuation of AGCO stock is very attractive and the company tends to rebound very quickly from downturns. Taken together, these points make AGCO an excellent defensive stock.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry Ramer has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.
