AG mostly & NH, DE from Barrons: Share buybacks are the rage in Corporate America, but sometimes they are executed poorly. Take the case of AGCO, a leading maker of farm equipment.
AGCO repurchased 3.5 million shares of its stock during May and June, or 6% of its stock outstanding. At the same time AGCO was buying back its shares, its business was worsening. AGCO ended up paying an average price of $25 a share for stock that now trades for 11 1/4 .
AGCO's stock has fallen sharply in the wake of weak second-quarter profits and the company's downbeat outlook for the rest of 1998. Wall Street analysts have sharply cut their 1998 and 1999 profit estimates. AGCO is now expected to earn $2 a share in 1998 and 1999, down from earlier estimates of over $3 in both years.
AGCO's management came under fire during a conference call after the share buyback and earnings were reported recently. Wall Street analysts couldn't understand why the company bought back so much stock at a time when its business was deteriorating. To make things worse, AGCO said that it was suspending its share-buyback program and that it will now use cash for debt paydown and acquisitions. For the same money it laid out to buy back 3.5 million shares, AGCO could now repurchase more than double that amount.
The entire farm-equipment sector has been rocked lately. AGCO has lost half its value since late June. New Holland has fallen by 25%, to 15 5/8, while Case is off 33%, to 31 11/16. Industry leader Deere is off about 20% to 42 1/8 in the past five weeks.
The Asian, African and Russian markets are weak, and low grain prices are hurting farmers in the U.S. and Europe, resulting in higher levels of discounting. That said, the sector could offer opportunity if current earnings projections are borne out because the stocks now trade at rock-bottom P/Es.
AGCO changes hands at 5.5 times 1998 profits. New Holland and Case have P/Es of around six, and Deere has a multiple of under 10. AGCO trades at about its tangible book value.Share buybacks are the rage in Corporate America, but sometimes they are executed poorly. Take the case of AGCO, a leading maker of farm equipment.
AGCO repurchased 3.5 million shares of its stock during May and June, or 6% of its stock outstanding. At the same time AGCO was buying back its shares, its business was worsening. AGCO ended up paying an average price of $25 a share for stock that now trades for 11 1/4 .
AGCO's stock has fallen sharply in the wake of weak second-quarter profits and the company's downbeat outlook for the rest of 1998. Wall Street analysts have sharply cut their 1998 and 1999 profit estimates. AGCO is now expected to earn $2 a share in 1998 and 1999, down from earlier estimates of over $3 in both years.
AGCO's management came under fire during a conference call after the share buyback and earnings were reported recently. Wall Street analysts couldn't understand why the company bought back so much stock at a time when its business was deteriorating. To make things worse, AGCO said that it was suspending its share-buyback program and that it will now use cash for debt paydown and acquisitions. For the same money it laid out to buy back 3.5 million shares, AGCO could now repurchase more than double that amount.
The entire farm-equipment sector has been rocked lately. AGCO has lost half its value since late June. New Holland has fallen by 25%, to 15 5/8, while Case is off 33%, to 31 11/16. Industry leader Deere is off about 20% to 42 1/8 in the past five weeks.
The Asian, African and Russian markets are weak, and low grain prices are hurting farmers in the U.S. and Europe, resulting in higher levels of discounting. That said, the sector could offer opportunity if current earnings projections are borne out because the stocks now trade at rock-bottom P/Es.
AGCO changes hands at 5.5 times 1998 profits. New Holland and Case have P/Es of around six, and Deere has a multiple of under 10. AGCO trades at about its tangible book value. |
