By Bob Tita
Farm equipment manufacturers CNH Global N.V. (CNH) and Agco
Corp. (AGCO) topped second-quarter profit expectations, reflecting
surging sales growth in South America and continued strength in the
North America machinery market.
Agco raised its sales and profit outlook for 2013, while CNH
affirmed its earlier guidance, but raised its forecast for
industry-wide sales of tractors and combines in South America.
The companies' bullishness was underpinned by second-quarter
profit margin increases and farmers' continued interest in buying
equipment, despite steadily falling prices for corn that could
dampen equipment demand next year. Prices for corn in the U.S. are
down more than 40% from the record high of a year ago.
"Order books are pretty strong and I'm pretty optimistic that
next year will be a good year," said Agco Chairman and Chief
Executive Martin Richenhagen during a conference call Wednesday,
adding that "2014 looks pretty stable to me."
The reports from CNH and Agco, the world's second and third
largest sellers of farm machinery by sales respectively, likely
foreshadow solid results from industry leader Deere & Co.,
(DE), when it reports earnings Aug. 14.
"We don't expect to forecast a significant decline in net
farming income on a global scale because if you look at what's
going on in Brazil, what's going on in Europe and North America, I
don't think there's a profitability crunch for our clients," said
Richard Tobin, chief executive for CNH, whose machinery brands are
Case IH and New Holland.
CNH, which is headquartered in the Netherlands and managed from
Burr Ridge, Ill., reiterated that it expects revenue this year to
increase by 5% over 2012's $19.4 billion and anticipates an
operating margin of between 8.5% and 9%. Agco moved up its outlook
saying it now expects sales of $10.8 billion to $11 billion and
earnings per share of about $6. In April, the company forecast
sales of $10.5 billion to $10.7 billion and earnings of $5.50 to
$5.70 a share.
Agco, based in based in Duluth, Ga., also bumped up its
industry-wide sales forecast for tractors in South America. It now
expects this year's sales volumes to rise by 15% to 20% above 2012,
compared with a 10% increase predicted in April. CNH also moved up
its tractor forecast, saying it now sees tractor sales in Latin
American sales rising 15% to 20% this year, compared with a 10% to
15% increase predicted in April. CNH expects South American combine
sales to rise 35% to 40%, up from a 20% to 25% increase forecast
earlier. In North America, both companies expect industry-wide
tractor sales to increase about 5% this year.
During the second quarter, the companies registered big sales
gains in South America, where a combination of high crop prices,
big harvests and a government-sponsored financing program in Brazil
for farm machinery purchases have been driving demand for tractors
and harvesting combines.
CNH's second-quarter farm machinery sales in Latin America sales
rose 69% from a year earlier, while Agco's reported a 20% increase
in South America sales. Agco, whose tractor brands include Massey
Ferguson, Challenger, Fendt and Valtra, is the sales leader in
tractors in Brazil, South America's largest agriculture market.
Meanwhile, in North America, Agco's second-quarter sales rose
7.6% from a year ago, while CNH reported a 12% sales gain farm
machinery.
Overall for the second quarter, Agco's profit rose 4.3% from a
year ago to $213.7 million, or $2.15 a share. Its operating margin
improved to 10.7% from 9.8% a year ago, as sales rose 13.3% to
$3.04 billion. Wall Street analysts expected the company to earn
$1.80 a share on $2.82 billion of sales.
CNH, which also makes construction equipment, reported a 33%
increase in second-quarter profit to $471 million, or $1.92 a
share. Excluding restructuring costs and other items, earnings rose
to $1.93 a share from $1.47. Its operating margin improved to 12%
from 10.4% a year earlier, as sales climbed 9% to 5.48 billion. The
company's 13% increase in farm machinery sales was offset by a 6%
drop in construction equipment sales. Analysts polled by Thomson
Reuters had expected the company to earn $1.48 a share on revenue
of $5.27 billion.
"It's hard to complain about either of these companies," said
Adam Fleck, an analyst for research firm Morningstar Inc. "You have
to hand it to the management of both companies for expanding
margins."
Last week, CNH shareholders gave final approval to a merger with
Italy's Fiat Industrial SpA (FI.MI), which owns a majority of CNH's
shares. Once the merger is completed, CNH's name will change to CNH
Industrial. The new company will include Fiat's Iveco brand of
commercial trucks and engines, along with CNH's farm and
construction machinery. CNH Industrial's stock will be listed in
New York and Milan.
In recent trading, Agco's stock was up 3% at $56.54 a share,
while CNH was up 5.5% at 47/23 a share.
--Write to Bob Tita at robert.tita@dowjones.com
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