AGCO's Q4: Is the Parking Lot Full or Just Getting Empty?

The numbers tell a story of two worlds. On one side, AGCO hit a record for cash generation, pulling in $740 million in free cash flow for the full year. That's more than $440 million above 2024, a powerful testament to operational discipline. On the other side, the top line tells a different tale: full-year net sales fell 13.5% to $10.1 billion. The decline narrows to just 7% when you strip out the Grain & Protein business sale, but the core message is clear-farmers are buying less new equipment.

This cash flow surge is impressive, and it funded a $250 million share buyback in the quarter. Yet the central question for investors is whether this cash is a sign of a healthy, growing business or a symptom of a market where demand is simply drying up. The company's own actions provide a clue. Despite a 9% sequential reduction in units and a 30% reduction in North American dealer inventories, the months of supply only decreased slightly. Management plans to underproduce by around 10% in the first half of 2026 to rightsize the pipeline. That's not a sign of a hot market; it's a classic inventory correction.

The bottom line is that AGCO's record cash flow is being generated in a soft market. The adjusted EPS for the year was $5.28, a 13.5% drop, which masks the underlying performance of the core farm equipment business. The company is pulling every lever-cost savings, pricing power, and aggressive inventory management-to protect cash flow. The real test is whether this cash generation can continue if the market stays soft, or if it's a temporary windfall before the next downturn hits. For now, the parking lot isn't full, but it's also not empty.

The Smell Test: Inventory, Demand, and the Farmer's Wallet

The numbers on inventory tell a clear story of a market trying to catch its breath. Dealer inventory units in North America fell more than 30% for the full year, a massive correction. Yet the months of supply at seven remain stubbornly high, well above the company's six-month target. That disconnect is the key. It means the correction is still in progress; the pipeline is being drained, but it's not empty yet. Management's plan to underproduce by about 10% in the first half of 2026 is a direct acknowledgment that the work isn't done. This deliberate slowdown is a classic inventory correction, not a sign of a hot market.

The cost of this correction is clear in the margins. By cutting production by over 50% in the fourth quarter to align with dealer needs, the company took a hit from under-absorption and discounting. The result was that North America remained below breakeven in the quarter. Management expects that painful situation to persist for the first two or three quarters of 2026. The bottom line is that right-sizing inventories comes at a near-term profit cost. This isn't a problem with product quality or brand loyalty; it's a direct result of farmers holding onto their old tractors.

That farmer's wallet is the real constraint. The soft demand environment is forcing production cuts and inventory corrections, not because the machines aren't good, but because the cash flow to buy new ones is tight. This is a classic cycle where economic pressure leads to deferred purchases. The company is trying to manage the fallout, but the headwinds are persistent. They expect $65 million in incremental tariff costs in 2026, which will squeeze margins further even after planned price actions. It's a double whammy: less demand from farmers and higher input costs.

Zooming out, the precision ag business offers a glimmer of hope. The PTx segment hit $860 million in revenue last year, driven by new products and a growing dealer network. Yet even there, management expects only flat to modestly up revenue in 2026. The technology is compelling, with claims of significant savings, but it's not enough to offset the broader market softness. The story here is one of resilience within a weak sector, not a turnaround. For now, the parking lot isn't full, but the farmers aren't rushing to fill it either.

The Bright Spot: Precision Ag Momentum and Cash Flow

While the core equipment market is soft, one part of AGCO's business is showing real traction. The precision ag (PTx) segment hit about $860 million in revenue last year, a solid figure that grew from a strong base. More importantly, it's a story of product momentum: the company launched 14 new products and more than doubled its network of elite dealers to over 70 globally. This isn't just about selling more gadgets; it's about building a service and support ecosystem that keeps farmers engaged with the brand.

Management expects this PTx engine to keep running in 2026, with revenue targeted to be "flat to modestly up". The new tech being rolled out, like SymphonyVision claiming ~60% chemical savings, is designed to deliver tangible cost benefits that could help justify a purchase even in a tight budget. This segment is the company's best hope for growth, acting as a counterweight to the broader equipment slump.

Crucially, this resilient part of the business is a key driver behind the record cash flow. While the core production cuts hurt margins, the parts business-where farmers buy replacement items and services-held up well. In the fourth quarter alone, parts sales were $440 million, up 5%. That steady stream of revenue and cash from service and support is a classic defensive moat. It's the kind of business that keeps generating cash even when new equipment sales slow down.

So, the cash flow story has a clear source. The record $740 million in free cash flow for the year wasn't just from cost cuts; it was fueled by this combination of disciplined production in a soft market and the underlying strength in parts and precision ag. The parking lot for new tractors may be empty, but the service bays are busy, and the tech pipeline is full. That's the bright spot that's keeping the lights on.

Catalysts and What to Watch in 2026

The investment thesis hinges on a simple question: is the market soft because farmers are waiting for a better deal, or because they simply can't afford to buy? The catalysts for a turnaround are clear, but they are also tied to a specific timeline. The main one is the success of the PTx rollout and the return of North American profitability as inventory levels finally stabilize. The primary risk is that soft demand persists longer than expected, delaying the margin recovery and testing the company's cash flow strength.

Management's playbook is straightforward. They are running "intentionally low production" to normalize inventories, and they plan to underproduce by about 10% in the first half of 2026 to rightsize the pipeline. The key metric to watch is dealer inventory months of supply. A sustained drop below five months, especially in North America where it sits at seven, would signal that demand is finally returning and that the painful inventory correction is nearing an end. Until then, the parking lot remains empty.

The bright spot is the precision ag (PTx) segment. With $860 million in revenue last year and a network of over 70 elite dealers, it's the company's best growth engine. The rollout of new products like SymphonyVision, which claims ~60% chemical savings, is designed to deliver real-world utility that could help justify a purchase even in a tight budget. Management expects PTx revenue to be "flat to modestly up" in 2026. If it can show even modest acceleration, it would prove the tech is resonating and provide a counterweight to the broader slump.

The bottom line is that the company is betting on a V-shaped recovery in the core equipment market. They are sacrificing near-term profits-North America margins are likely negative for the first two or three quarters-to clear the pipeline. This is a classic inventory correction, not a sign of a hot market. The risk is that the market stays soft, forcing more underproduction and further margin pressure. The record cash flow gives them a runway, but it's not infinite. The setup is clear: watch the inventory numbers, the PTx momentum, and the return of profitability in the North American core. If those pieces align, the parking lot could fill up. If not, the correction could drag on.