July 28, 2009 / 2:16 PM / in 8 years

UPDATE 2-Agco beats, but cuts outlook on farm weakness

* Q2 EPS 61 cents; Wall Street view 53 cents

* Sees demand for farm equipment continuing to soften

* Reiterates interest in possible North American deal

* Shares down 1.5 percent (Adds details from conference call, analyst comments and byline; updates shares, recasts throughout)

By James B. Kelleher

CHICAGO, July 28 (Reuters) - Farm equipment maker Agco Corp (AGCO.N) posted stronger-than-expected quarterly earnings on Tuesday as improved margins in its North American operations offset a drop in demand for its tractors and harvesters amid the worldwide recession.

But the company cut its full-year sales and earnings forecast, sending its shares lower, saying “worldwide industry demand for farm equipment is expected to soften for the remainder of 2009.”

Agco reported a second-quarter net profit of $57.4 million, or 61 cents a share, down from $129.6 million, or $1.31 a share, a year earlier.

Sales fell 25 percent to $1.80 billion.

The results topped Wall Street expectations, thanks in part to what Jefferies & Co analyst Stephen Volkmann called surprisingly strong margins in North America.

Analysts, on average, had expected the Duluth, Georgia-based company to earn 53 cents a share on sales of $1.75 billion, according to Reuters Estimates.

During a conference call to discuss the results, Agco said production cuts and temporary plant shutdowns during the second half of the year would cut into the profitability of the North American unit. But it held out hope that margins in South America would begin to improve.

Agco cut its full-year sales guidance to a range of $6.5 billion to $6.8 billion, down from a previous forecast of $6.7 billion to $7.0 billion. It now expects earnings of $2.00 to $2.25 a share, down from previous forecast of $2.00 to $2.50.

Agco shares were down 47 cents, or 1.5 percent, at $31.09 in midday trade on the New York Stock Exchange.

CEO FANS DEAL TALK

During the call, Martin Richenhagen, the company’s chairman, chief executive and president, forecast further consolidation in the farm equipment industry and said Agco “was prepared to do something, but it should move the needle substantially.”

“If we do something in North America, it should help us to improve our profitability dramatically,” hr said.

He acknowledged that with that kind of benchmark, “it rules out a lot of things ... but in case something really interesting and important would become available, we certainly would be interested.”

Richenhagen described the ideal North American M&A target as “cheap, profitable and big.”

In a recent interview with Reuters, Richenhagen said he was “very interested” in doing a major M&A deal in North America if it would expand the company’s “modest” market share in the region.

In the world of farm equipment, Agco lags behind No. 1 Deere & Co (DE.N) and No. 2 CNH Global NV CNH.N, a subsidiary of Italian carmaker Fiat SpA FIA.MI. It makes tractors, combines and other equipment under the Challenger, Fendt, Massey Ferguson and Valtra brand names.

It derives the majority of its sales in Europe and South America and remains a marginal player in North America, though its business there recently became profitable despite its modest market penetration.

Any North American deal with Deere would likely stumble with antitrust authorities, but a deal to purchase some part of CNH, which also makes construction equipment, could squeak through, according to analysts.

A deal with CNH makes more sense, some analysts say, given Fiat’s purchase earlier this year of automaker Chrysler, which makes CNH look more and more like the odd man out in a car-centric portfolio. (Reporting by James B. Kelleher; editing by John Wallace)

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