AGCO eyes higher profit as farm boom sparks equipment demand

CHICAGO (Reuters) - To Eric Hansotia, AGCO Corp’s new chief executive, a resurgent farm economy has created an opportunity to finally realize one of his company’s long-held ambitions - posting a 10% operating margin.

FILE PHOTO: People look at AGCO equipment as they attend National Farm Machinery show in Louisville, Kentucky, February 12, 2016. REUTERS/Meredith Davis/File Photo

The Georgia-based farm equipment maker, whose machinery brands include Fendt, Massey Ferguson and Challenger, had set that target in 2009. But the goal has remained elusive thus far.

Operating margin measures the profit a company makes on every dollar of sales. AGCO, which competes globally with Deere & Co and CNH Industrial, reported an operating margin of 7% in 2020 and is looking to increase it by as much as 100 basis points this year.

With surging grain prices driving a turnaround in the U.S. farm economy after a years-long recession, farmers are buying new tractors and combines to replace their aging fleet. They are also investing in technology to reduce their input costs and improve productivity.

As a result, AGCO is enjoying the strongest order book in years and could deliver a higher profit than the decade-old target, said Hansotia, who took the reins in January.

“Depending on what happens with the industry, that’s a possibility,” he told Reuters in a video interview.

AGCO expects to hit the 10% goal by 2024. But some analysts expect it to get there as early as next year.

To profit off the agriculture boom, AGCO is doubling down on high-margin large equipment business. It is launching some of its products, popular in Europe, for row crop farmers in North America.

It is aiming to double its precision technology business in two to three years. The technology allows farmers to plant seeds accurately at a faster speed than conventional planting systems, helping them save on seed and fertilizer costs, and improve crop yields.

While the technology has been largely drawing interest from large farmers, Hansotia said a hot commodity market is encouraging even small and mid-size farmers to sign up for it.

“They’re jumping in at a larger rate than the large farmers,” he said.

Reporting by Rajesh Kumar Singh; Editing by Steve Orlofsky