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Investing.com -- S&P Global Ratings has revised its outlook for AGCO Corp. to stable from positive, due to a weaker profitability forecast. The ratings agency believes AGCO Corp.’s EBITDA margin fell to about 10% in 2024 and will remain between 10% and 11% in 2025. This anticipated margin deterioration is seen as weaker than that of higher-rated manufacturers also exposed to cyclical patterns of demand.
Despite this, all ratings on the company, including the ’BBB-’ issuer credit rating, have been affirmed by S&P Global Ratings. The stable outlook reflects the expectation that AGCO will maintain its debt to EBITDA ratio below 3x, even as EBITDA margins are projected to remain between 10%-11% in 2025.
The rating actions were taken by S&P Global Ratings on February 18, 2025. The agency noted that AGCO is improving its structural profitability more slowly than anticipated, with its EBITDA margin estimated to be around 10% in 2024 due to a global fall in demand for agriculture equipment. The company’s acquisition of high-margin Trimble and divestiture of the low-margin Grain and Protein business also influenced AGCO’s profitability in 2024.
Comparatively, smaller manufacturer Toro Co. (NYSE:TTC) has maintained an EBITDA margin of 15%-17%, despite less severe demand weakness. S&P Global Ratings’ expectations for AGCO are more aligned with those for Flowserve (NYSE:FLS), a manufacturer of new equipment and spare parts for the competitive flow control market, which saw margins fall to 11% from 15% due to a significant slowdown in oil and gas investment in 2020.
Despite these challenges, AGCO’s margin performance is seen as stronger than in previous demand cycles, with an EBITDA margin of about 10% in 2024, 150 basis points stronger than the 8.5% of 2016. This is primarily attributed to the company deriving a greater share of revenue from higher-margin products like its Fendt brand and precision agriculture equipment.
Looking ahead, the company’s structural profitability is expected to improve over the next three to four years, with a goal of growing higher-margin parts sales by 5% and Americas Fendt revenue by 10% annually through 2029. Restructuring actions are expected to yield $200 million of annual benefit in 2027.
AGCO’s leverage is expected to remain below 3x, with its debt to EBITDA ratio likely to rise 0.5x to about 3x in 2025. The company is not anticipated to increase debt to fund dividends, and if demand and profitability significantly underperform the forecast, it is expected to reduce its special dividend to conserve cash and reduce its adjusted debt.
S&P Global Ratings-adjusted EBITDA is expected to vary significantly from peak to trough, with EBITDA falling 50% to $630 million in 2016 from $1.3 billion in 2013. The agency forecasts a similar pattern for the current cyclical decline, with EBITDA dropping to about $1 billion in 2025, compared with $2.1 billion in 2023.
The stable outlook reflects the expectation that AGCO will maintain its debt to EBITDA ratio below 3x, even as margins remain between 10%-11% in 2025. However, the rating could be lowered if the debt to EBITDA ratio rises above 3x on a sustained basis due to significant debt-funded acquisitions, greater-than-anticipated level of share repurchases, or further demand deterioration.
On the other hand, the rating could be raised if additional structural improvement in the company’s profitability keeps the EBITDA margin comfortably above 11% throughout the agriculture investment cycle, or if the company maintains its debt to EBITDA ratio below 2x, supported by a more conservative financial policy.
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