AGCO Stock Appears To Be Significantly Overvalued
- By GF Value
The stock of AGCO (NYSE:AGCO, 30-year Financials) appears to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $136.22 per share and the market cap of $10.3 billion, AGCO stock is estimated to be significantly overvalued. GF Value for AGCO is shown in the chart below.
Because AGCO is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 5.3% over the past three years and is estimated to grow 5.86% annually over the next three to five years.
Link: These companies may deliever higher future returns at reduced risk.
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. AGCO has a cash-to-debt ratio of 0.32, which which ranks worse than 70% of the companies in the industry of Farm & Heavy Construction Machinery. The overall financial strength of AGCO is 6 out of 10, which indicates that the financial strength of AGCO is fair. This is the debt and cash of AGCO over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. AGCO has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $9.6 billion and earnings of $6.79 a share. Its operating margin is 7.78%, which ranks in the middle range of the companies in the industry of Farm & Heavy Construction Machinery. Overall, the profitability of AGCO is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of AGCO over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. AGCO's 3-year average revenue growth rate is in the middle range of the companies in the industry of Farm & Heavy Construction Machinery. AGCO's 3-year average EBITDA growth rate is 13.8%, which ranks better than 69% of the companies in the industry of Farm & Heavy Construction Machinery.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, AGCO's return on invested capital is 9.88, and its cost of capital is 8.55. The historical ROIC vs WACC comparison of AGCO is shown below:
In summary, the stock of AGCO (NYSE:AGCO, 30-year Financials) appears to be significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks better than 69% of the companies in the industry of Farm & Heavy Construction Machinery. To learn more about AGCO stock, you can check out its 30-year Financials here.
To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.
This article first appeared on GuruFocus.
