AGCO Corp reported F1Q2009 earnings with 1Q EPS of $0.36 vs. consensus estimates of $0.24. We do note that the $0.36 EPS was off 42% yoy compared to $0.63 in F1Q2008. The beat was largely driven by cost reductions aiding in margin control. Gross margin came in at 17%, down 40 bps yoy and operating margin came in at 3.7%. Both metrics outpaced consensus estimates leading to the surprise.

Total sales were down 12% yoy, largely driven by FX impacts. Excluding FX, sales were actually up 2.9% incrementally. South America continued to weigh on the company as demand was soft resulting in a reduction in sales of 27% yoy.

Outlook

AGCO management continues to see softness in the Ag sector, with much of the weakness occurring in South America, Europe, and Russia. Domestic markets are also projected to remain subdued as demand has fallen off, which is a point echoed by CNH Global management last week.

As a result of the weakening demand, AGCO lowered its full year EPS guidance to $2.00-$2.50 from previous estimates of $3.00-$3.25. Full year sales are expected to be $6.7-$7.0B, down from previous estimates of $7.5-$7.8B, largely driven by negative currency translations. Much of this retraction, management noted, is due to extreme weakness in North America in addition to all other global markets. Demand in North America is now expected to be down 15%-20% on the year. South America is expected to decline 25%-35%.

Management also expects F2Q2009 results to be off significantly as capital charges and production cuts hit the bottom line.

As with Deere, CNH Global and other heavy equipment manufacturers, AGCO has found itself stuck in the middle of a very weak cycle in its business. Global demand has all but disappeared and with limited visibility of a turnaround, current opportunities don’t look too promising. However, we do remain fans of the Ag segment broadly, as long term fundamentals remain intact and supply and demand still works.

-GDH