Indeed, she has purchased approximately $75 million in shares since April 1 alone. Thus far, she has shown no indication of slowing down her purchase program.
Although she is not intimately involved with the day-to-day operations of the firm, Srinivasan’s status as an insider cannot be taken lightly. As such, investors who have any interest in the agricultural machinery space may wish to take a closer look at AGCO Corporation (NYSE:AGCO) and determine if this director has an ulterior motive for her purchases. Ultimately, there is a potential for investors who follow her lead to profit handsomely.
AGCO’s Financials at a Glance
AGCO manufactures and sells a wide range of agricultural equipment, including tractors, mechanical plows, grain spreaders, grain storage bins, and various engines and replacement parts. Its principal brands include Massey Ferguson, GSI and Challenger. Financially, the company has a market capitalization of about $5 billion and earned income of $522.1 million on approximately $10 billion in 2012 revenues. This equates to a profit margin of 5.2 percent and a return on equity of 15.8 percent; however, AGCO Corporation (NYSE:AGCO) recently suffered a quarterly revenue drop of more than 64 percent and carries a debt load that exceeds its cash balance by about 50 percent.
Running in a Competitive Space
AGCO must deal with several larger competitors. For instance, Moline, Illinois-based Deere & Company (NYSE:DE) has a market capitalization that exceeds AGCO’s by a factor of seven. Deere & Company (NYSE:DE) also pays a superior dividend of approximately 2.4 percent. Deere earned $3.2 billion on $36.8 billion gross revenues in 2012. This produced a profit margin of 8.6 percent and a return on equity of 44.7 percent. Both of these figures are superior to AGCO Corporation (NYSE:AGCO)’s corresponding values; however, Deere isn’t experiencing the same insider buying.
Some of these competitors are based overseas. Japanese industrial conglomerate Kubota Corp (ADR) (NYSE:KUB) maintains a heavy presence in the agricultural space and boasts a market capitalization of more than $18 billion. Financially, the firm has a profit margin of 6.2 percent and a return on equity of just over 10 percent. As such, it is not positioned quite as strongly as Deere & Company (NYSE:DE); however, its more diversified portfolio makes it less vulnerable than AGCO to economic shocks within the agricultural industry.
Key Threshold Cleared
News that Srinivasan has cleared the key 5 percent reporting threshold was greeted with interest by some market-watchers. It is important to note that Srinivasan does not appear to be using options or leverage to make her purchases. As CEO and part owner of a privately held, India-based tractor manufacturer known as Tafe Motors and Tractors, she is believed to be among India’s richest individuals. Although the precise extent of her finances is difficult to judge, it is safe to assume that she could double her current stake in AGCO Corporation (NYSE:AGCO) without putting a serious strain on her personal cash flow.
Long-Term Outlook and Possible Motives
Given Srinivasan’s aggressive and seemingly out-of-the-blue move to accumulate shares in AGCO, it is entirely appropriate to search for a motive for her actions. While the company appears to be performing fairly well, it operates in a competitive industry that is dominated by larger players, and thus is not a candidate for explosive growth. The company’s recent decision to initiate a dividend may have some bearing on Srinivasan’s interest.
Alternatively, it is possible that Srinivasan wishes to play a larger role in the company’s decision-making process. Given the size and rapidity of her purchases, it seems fair to question whether she will be a passive shareholder. What’s more, her strong ties to a family-owned tractor business in her native country may well endear her to AGCO Corporation (NYSE:AGCO). By growing her stake in the firm and eventually engineering a takeover bid, she could gain a promising American foothold for Tafe Motors. Incidentally, any future transaction that takes AGCO private could benefit the company’s regular shareholders as well.
How to Play This Situation
Given its solid but not spectacular financial situation and growth prospects, AGCO has had lukewarm support from many market-watchers. Although the company’s share price has risen during the past year, it remains below its two-year highs.
The combination of an ongoing share buyback program and Srinivasan’s aggressive buying suggests that AGCO has more room to run. Although it is premature to suggest that a takeover or going-private transaction will happen in the near future, investors who cannot discount this possibility should consider opening long positions in AGCO Corporation (NYSE:AGCO)’s stock. Even those who believe that Srinivasan’s transactions herald a coming spate of good earnings reports may wish to buy into the stock at this point.
The article Massive Insider Buys By A Director originally appeared on Fool.com and is written by Mike Thiessen.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
