Consider This Cheap Agricultural and Construction Equipment Company
Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In an earlier post for the Fool, I argued that Deere & Co (NYSE: DE) was an interesting bet for long-term growth due to the agricultural boom the world is currently experiencing. While investigating Deere’s competitors, I discovered a less well-known company that nevertheless appears to offer enticing growth opportunities, and is very cheap at the moment to boot. Although it is not as large as its main rivals Deere and Caterpillar (NYSE: CAT), CNH Global (NYSE: CNH) may be worthy of consideration.
CNH Global manufactures and markets a wide range of agricultural and construction equipment, its best known brand probably being the New Holland line of tractors. Operating in over 170 countries worldwide, with a market cap of $9.61 billion and almost 33,000 employees, the firm certainly has a global presence as their name would suggest. The stock is up just over 8% in the last twelve months. It has a fairly high 2.56 beta and unfortunately, unlike its rivals, does not offer a dividend.
Earnings and Outlook
CNH has had some encouraging earnings reports in the last few years, with only one EPS miss since Q1 2010. In the Q3 2012 report, EPS beat by a healthy 14.7%. EPS was up 18% for the quarter with a net sales increase of 5%. According to management, demand for agricultural equipment remained solid despite severe drought conditions in the United States. This type of equipment accounted for 83% in the quarter, which reflects the firm’s sensitivity to agricultural demand. This segment managed to achieve an operating margin of 12% for the quarter. Despite the agricultural boom, the company expects equipment unit volume to be flat to down 5% for full-year 2012. On the other hand, full-year guidance sees revenues up 5% and an operating margin over 8.6%.
Valuations and Metrics
Compared to the industry average P/E of 11x, which is already low, CNH looks decidedly cheap at 8.46x earnings. The price to book is also very low at 1.07. The operating margin is encouraging at almost 12%, and the return on equity is decent as well at 13.46%. For comparison, CNH’s main rivals Caterpillar and Deere trade at 9x and 11.34x earnings, respectively. Based on price to book, Deere looks the most expensive of the three at 4.88. Looking at balance sheet strength, it can be said that all three have a fairly high amount of debt. Deere takes the cake here according to Yahoo finance, with a total debt to equity ratio of almost 475. CNH has a total debt to equity ratio of about 196.
For those willing to take a gamble on global agricultural growth, but not willing to take up positions on agricultural commodities, manufacturers of agricultural equipment may represent a compelling alternative. With strong earnings, and currently trading at low multiples, the industry looks inexpensive as a whole. CNH Global looks particularly strong here, seeing strong demand and earnings growth. Also, the company appears undervalued compared to the industry and may deliver good long-term value for shareholders.
DUJames has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!