By Alex Gavrish, Etalon Investment Research; author of “Wall Street Back To Basics”
Blue Harbour Group initiates a position in AGCO Corporation
On August 14th, 2014, Blue Harbour Group disclosed a small stake of 0.9% in shares of AGCO Corporation (NYSE:AGCO), a leading manufacturer and distributor of agricultural equipment worldwide. As of June 30th, 2014, the position accounted for 1.8% of Blue Harbour’s overall portfolio. Blue Harbour Group is an activist hedge fund and is managed by Cliffton Robbins. Blue Harbour is known for its activist investments, while working in a collaborative and supportive manner with companies and management (as opposed to more “active” activist investors who might engage in proxy fights, etc.). It is also interesting to note that Indian company Tractors and Farm Equipment Ltd (TAFE), which is AGCO’s supplier in India, accumulated a 8.6% stake. TAFE initially disclosed the purchase of 5.3 million shares in April of 2013, and over the past year increased its holding to 8.1 million shares. The total cost of the acquired shares was $403 million, which means that TAFE paid an average price of $49.8 per share. AGCO Corp, in turn, owns a 23.75% stake in TAFE.
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AGCO Corporation (NYSE:AGCO) is a leading manufacturer and distributor of agricultural equipment and related replacement parts throughout the world. Company sells a full range of agricultural equipment, including tractors, combines, self-propelled sprayers, hay tools, forage equipment, tillage, implements and grain storage and protein production systems. AGCO Corp’s products are widely recognized in the agricultural equipment industry and are marketed under a number of well-known brands, including: Challenger®, Fendt®, GSI®, Massey Ferguson® and Valtra®. Company distributes most of its products through a combination of approximately 3,100 independent dealers and distributors in more than 140 countries. AGCO Corporation (NYSE:AGCO)’s two principal competitors on a worldwide basis are Deere & Company (NYSE:DE) and CNH Industrial NV (NYSE:CNHI)
Based on a recent share price, AGCO Corporation (NYSE:AGCO) had maket capitalization of $4.4 billion. Net debt stood at about $0.9 billion and enterprise value equaled $5.3 billion. Company is currently valued at an EV/EBITDA multiples of x4.8 and x4.6, based on annualized H1 2014 and full 2013 year results, respectively. P/E valuation ratios are currently x8.3 and x7.4 based on results for the same periods. During 2013, AGCO Corp generated $405 million in free cash flow, which equates to a free cash flow yield of 9.1%. Company pays a small regular quarterly dividend of $0.11 per share, which provides an annual dividend yield of 0.9%. During first six months of 2014, AGCO Corp spent $290 million on share repurchases. This amount represents 6.5% of company’s current market capitalization. The share buyback looks very positive and timely in light of the fact that company’s share price declined by about 21% during last 12 months. Currently there is an outstanding authorization for repurchase of up to $241 million worth of shares. Attractive and conservative valuation, presence of a “passive” activist investor who is well known for investments in high-quality companies with good management, and a recent increase of a stake by a strategic investor (TAFE) make AGCO Corporation’s shares an interesting investment target for a long-term value investor.