Over the past six months, AGCO has been a great trade, beating the S&P 500 by 7.8%. Its stock price has climbed to $113.08, representing a healthy 13.1% increase. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is there a buying opportunity in AGCO, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Do We Think AGCO Will Underperform?

Despite the momentum, we're swiping left on AGCO for now. Here are three reasons why there are better opportunities than AGCO and a stock we'd rather own.

1. Core Business Falling Behind as Demand Declines

We can better understand Agricultural Machinery companies by analyzing their organic revenue. This metric gives visibility into AGCO’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.

Over the last two years, AGCO’s organic revenue averaged 15.1% year-on-year declines. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests AGCO might have to lean into acquisitions to grow, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus).

2. EPS Took a Dip Over the Last Two Years

While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.

Sadly for AGCO, its EPS declined by more than its revenue over the last two years, dropping 70%. This tells us the company struggled to adjust to shrinking demand.

3. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, AGCO’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

We cheer for all companies making their customers lives easier, but in the case of AGCO, we’ll be cheering from the sidelines. With its shares beating the market recently, the stock trades at 22.4× forward P/E (or $113.08 per share). At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere. Let us point you toward one of our top digital advertising picks.

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