AGCO: The Fat Years

One unlikely winner in this year's turbulent market is AGCO (AG ), a global maker of farm tractors and implements. With demand for farm equipment way down, why is AGCO stock shooting up? It leaped from 15 in July to 24 by Oct. 1, before easing to 22 on Oct. 9. "AGCO is reflecting what is sure to happen next year: Farmers will begin buying new gear because of higher grain prices and the passage in May of a new farm-support bill," says John Howard of Forstmann-Leff Associates, which has a 12% stake in the stock. Since June, worry about drought in farm states has driven grain prices up--especially corn, the most important U.S. crop. Corn prices are up 30% since May. And with the new subsidy bill, farmers could get $20 billion annually in federal aid.

"AGCO is the stock to own in this sector," says Joanna Shatney of Goldman Sachs: It stands to benefit the most from a recovery in farming. The stock is undervalued, she says, and the only pure play in farm equipment. AGCO has been on a drive to cut fixed costs and improve efficiency, she notes, which helped push earnings higher. And AGCO, which in December acquired Caterpillar's farm-equipment assets, expects the Caterpillar business to boost 2002 sales by $150 million to $175 million, rising to $500 million by 2005. Analyst Stephen Volkmann of Morgan Stanley raised his 2003 earnings estimates--based on the cost-cutting and the Cat buy--from $1.85 to $2.05, and his 2004 forecast from $2.60 to $3, vs. estimated 2002 profits of $1.10. Based on his numbers, he expects the stock to hit 31 by the end of 2003.

By Gene G. Marcial

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