Deutsche Bank: Time To Sell AGCO Corp

In a report published Sunday, Deutsche Bank analyst Vishal Shah downgraded AGCO Corporation (NYSE: AGCO) to Sell from Hold with a price target slashed to $40 from a previous $48, as the market is "far too optimistic" over the company's 2015 earnings.

"In our view, expectations are too high for the Parts, GSI and EAME businesses, all of which carry higher than corporate average margins," Shah wrote. "Moreover AGCO has limited scope in the form of either additional cost savings or accelerated buybacks to offset these headwinds."

AGCO's management has already guided its Parts sales (20 to 25 percent margins) to flat, but Shah noted that he expects sales to decline by 5 percent to 10 percent, resulting in an earnings per share drop of $0.15. Moreover, GSI sales (15 percent margins) have been guided to be up 8 to 10 percent, but the analyst is only expecting a 2 to 3 percent increase, yielding a $0.05 earnings per share headwind.

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Shah also stated that the company's 2015 guidance is based on foreign exchange rates as of January 31. Since then, the Euro (40 percent of sales) has declined by around 5 percent and the Brazilian Real (15 percent of sales) has dropped by 12 percent. These foreign exchange moves alone amount to a $0.13 earnings per share headwind.

Shah concluded that AGCO would need to find at least $55 million in immediate cost savings to offset the expected headwinds, and doing so would be difficult in a short timeframe. Furthermore, management will likely be limited in its ability to buy back shares this year, as free cash flow may fall short of the company's $300 million guidance, while its cash balance is running at a multi-year low.