Agricultural names have been battered as commodity prices have fallen, but the industry’s fundamentals remain relatively unchanged. According to UN data, global food prices have fallen by a third since peaking in June 2008, but prices that farmers pay for fertilizer, pesticides and other chemicals are less than 7 percent from their highs. Meanwhile, the global population is still expected to swell to nine billion souls by 2040.

Despite a short-term setback in commodity prices, agricultural plays still make solid investments for the long haul.

AGCO Corp (NYSE:AGCO) is the third-largest global manufacturer and distributor of agricultural equipment, selling everything from tractors and combines to irrigation equipment and diesel engines in more than 140 countries.

Facing stiff competition from larger peers such as Deere & Company (NYSE: DE), Caterpillar (NYSE: CAT), and CNH Global (NYSE: CNH), AGCO is attractive on two levels.

The first and most obvious is valuation. As you can see in the table at left, analyst estimates currently call for earnings per share to fall to $2.14 in 2009 from a high of $4.09 last year. That’s pushed the company’s price-to-earnings multiple to almost its lowest point so far this decade, coming slightly off last year’s low to 7.7 (see graph “Muted Expectations”). That’s a lower multiple than either Deere or Caterpillar, despite the fact that AGCO’s estimated earnings haven’t fallen nearly as much.

Second, despite being the third largest manufacturer of agricultural equipment in the world, AGCO still has a lot of room for growth. Over the past two decades, the company has pursued a fairly aggressive growth-through-acquisitions strategy, picking up more than 20 firms. That’s left the company generating the bulk of its revenue in international markets, including the lucrative farms of South America where the company boasts a 60 percent market share. North America, on the other hand, accounts for just 10 percent of sales; there’s ample opportunity to grow within its domestic market.

Much of the AGCO’s rapid growth was internally financed; the company sports a debt-to-equity ratio of just 0.35. Management forecasts that by the end of the year the company will have more than $700 million in cash on the books, leaving it with no net debt.

Management has also said that it will undertake efforts to bolster cash flow for the remainder of the year, including productivity improvements in its factories and production cuts to bring inventory back in line with demand. It will also increase spending on research and development to meet tighter emissions standards in some countries and improve performance on several tractor models.
Overall the company’s own earnings forecast appears a bit conservative, particularly since it factors in a much stronger dollar; it’s unlikely that we’ll see the dollar gain much ground in coming months–barring any major hiccups in the global economy. Also, prices for agricultural commodities are expected to improve in coming months, which would bolster farm incomes and boost equipment demand.

And over the past few years there have been persistent rumors that AGCO Corp would be acquired by one of its larger competitors. More often than not, rumors are just rumors and nothing comes of the scuttlebutt. But with AGCO’s share price well off mid-decade highs and its competitors flush with cash, such a deal isn’t beyond the realm of possibility.

WHY TO BUY
AGCO CORP (NYSE: AGCO, $29.07)

o Valuation still near decade-low
o Solid growth opportunity in North America
o Established low-cost operations in South America and Europe