Agco Harvests Growth in Emerging Markets
By 2050 there will be 9 billion people in the world — 2 billion more than there are now. To feed them all food production will have to double and that should mean strong long-term demand for new tractors and combines as more land comes under cultivation.
"It's the growing population, renewable fuels and changing diets in countries like India and China," that are driving greater food production and demand for farm equipment, Agco CEO Martin Richenhagen told CNBC's "Squawk Box" this week.
As emerging market affluence increases and diets move toward higher protein foods like meat, instead of chicken and grains, farmers must plant six to eight times the crops they would otherwise, he added.
Rival Deere is also bullish on the long-term opportunities to sell more farm machinery. The company notes that gross farm output will need to increase 3.4 percent annually over the next decade compared with 2.4 percent growth in the past decade if the world's food needs are to be met.
Both Agco, which sells Massey Ferguson machinery, and Deere are anticipating stronger demand from emerging markets like Latin America. Agco is forecasting good growth for its equipment across emerging markets with a 5 to 10 percent increase in South American sales next year due in part to growing sales of tractors to harvest sugarcane in Brazil.
There are also good long-term opportunities in Eastern Europe, which underinvested in equipment and where crop yields remain below Western levels.
(Read More: Fine-Tuning Your Global Economy Portfolio.)
Agco has turned its attention to Africa too. It recently bought a factory on the continent making it the first Western manufacturer to start producing tractors there, Richenhagen said.
The executive told CNBC establishing a manufacturing presence in the region makes sense. The population is expected to double to 2 billion people and farmers will have to start using more machinery instead of hand tools and animal labor to meet consequent food demand.
"They already have a problem with food security," the Agco CEO said.
But there is good news. "They have 60 percent of the global reserves of tillable land, and only 20 percent of this land is used today," Richenhagen said.
To help improve crop yields, Agco has set up a farm in Zambia to teach Africa's farmers about Western techniques and how to use the equipment. It is also helping to arrange financing, he said.
Nearer term, Agco is forecasting a 2013 revenue increase of 3 to 5 percent with earnings per share coming in at $5.50 to $5.75. It also expects a one percentage point increase in the operating margin to 9 percent next year.
(Read More: Boldest Predictions 2013.)
Both Jefferies and BMO both raised their price targets on the stock to $55 after the revised outlook. They maintain "buy" and "outperform" recommendations, respectively.
The BMO analyst wrote in the research note, "We reiterate our Outperform rating on Agco stock owing to strong industry fundamentals, the company's attractive geographic positioning, and the overly low valuation."
The $55 price target assumes Agco trades at 10 times 2013 estimates compared with about 9 times today.