Shares of farm machinery stocks went south Tuesday after Agco Corp. (NYSE:AG - News) forecast full-year earnings below analyst views, citing the impact of rising materials costs on margins.
The disappointing outlook marred an otherwise rosy first-quarter report for the No. 2 U.S. farm machinery maker. Earnings more than doubled from the prior year to 63 cents a share. Analysts polled by Thomson Reuters expected 47 cents. Sales rose 34% to $1.79 billion, also above views.
Bitter Harvest
But Agco said full-year results would be hurt by economic weakness, unfavorable exchange rates and spending on plant upgrades and other initiatives. The company forecast 2008 EPS of $3 to $3.15, well below the $3.26 expected.
"Projected operating margin improvement in 2008 ... is expected to be limited by spending on our strategic initiatives as well as the negative impact of currency translation," Agco CEO Martin Richenhagen said in a statement.
The weak dollar has buoyed Agco's sales. But it also is boosting costs of raw materials from Brazil and Europe, analysts said.
Banc of America Securities analyst Seth Weber said in a note to investors that he "doesn't view this guidance as presenting a change to our positive global agricultural thesis/opportunity."
Bad Day For Farm Sector
Wall Street had a more negative take, sending Agco shares down 11% to 60.96. It was the firm's worst one-day loss in at least a year and halted recent gains that saw the stock near its all-time high twice within the past two weeks.
Group mates Deere and Lindsay (NYSE:LNN - News) closed the day down 6% and 7%, respectively, halting both stocks' momentum. Deere hit a record 94.89 on April 18, while Lindsay peaked at 131.14 on April 22.
Meanwhile, Archer Daniels Midland (NYSE:ADM - News) fell 4% Tuesday. The grain processor cruised past first-quarter sales and earnings views, but investors might have been worried about a 31% profit drop in ADM's corn-processing business, which includes ethanol production. ADM blamed high corn prices and rising energy costs.
ADM shares, which set a record high of 48.95 on April 22, also suffered from Monday's Agriculture Department report showing that only 10% of the U.S. corn crop has been planted so far this year. That's down from 23% last year and a five-year average of 35% by this time. Bad weather has been blamed.
U.S. corn futures shot up to a record high on that report.
Concerns also have been raised about the prospect of legislation that would end government subsidies for ethanol, which has faced criticism for the role it plays in global food shortages.
Fewer subsidies would likely curtail farm production -- and hurt sales at equipment suppliers.
"Legislation against ethanol is a potential head wind for all agriculture-related stocks," said Lawrence De Maria, analyst at Sterne Agee. "It's been talked about more and more recently."
Highflying fertilizer stocks continued their recent retreat. Potash Corp. of Saskatchewan (NYSE:POT - News) fell 6% and Mosaic (NYSE:MOS - News) 4.5%. Intrepid Potash (NYSE:IPI - News) slid 5.5% to 45.62, its lowest close since coming public last week. It still is well above its $32 offering price.
Seed giant Monsanto (NYSE:MON - News) tumbled 9% in heavy volume.
Ag-related stocks clearly have benefited from high prices for corn, soy and other commodities amid a rise in biofuel production and increased demand for food grains in foreign markets.
In Agco's case, international revenue helped offset sluggishness in North America, where the ailing U.S. economy has dampened sales at the retail level.
Excluding currency swings, Agco's net sales grew just 10% in North America during the first quarter. That compares with 44% in South America, 28% in Asia/Pacific and 20% in Europe/Africa/Middle East.
"Agco is very nicely distributed around the world," said Charlie Rentschler, vice president at Wall Street Access. "There's not as much exposure to North America as some of the other companies."
South America has been a major driver -- particularly Argentina and Brazil, where first-quarter retail sales of tractors grew 64% and 47%, respectively.
High commodity prices played a big part in the growth there and elsewhere, company officials said.
"Many of the conditions that support commodity prices were present in the first quarter, including the increasing demand for crops used in food, animal feed, fiber and fuels," Richenhagen said. "The elevated commodity prices supported agricultural industry demand across our major market. In Brazil, industry volumes have risen to near prior peak levels."
But not all farm equipment stocks have fared as well. Last week Dutch equipment maker CNH Global (NYSE:CNH - News) posted first-quarter profit below views, citing internal and external bottlenecks.
Its stock fell almost 17% on the news, erasing the previous three months' gains. CNH continued to sell off Tuesday, closing the day down 5.
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