Should We Follow Mason Hawkins Into This Stock?

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Mason Hawkins, the talented mind behind Southeastern Asset Management, has nearly $23 billion in total assets under management. On May 10, he increased his stake in CNH Global (NYSE: CNH) by more than 150% to 3.7 million shares. In the past twelve months, CNH has exhibited a tepid stock price performance, declining more than 2.6% while the S&P 500 gained more than 10.7% during the same period. Should we follow Mason Hawkins into CNH Global? Let’s find out.

Fast growth in the past three years

CNH Global, based in the Netherlands, is involved in both agricultural and construction equipment industries, operating in three main business segments: Agricultural Equipment, Construction Equipment, and Financial Services. The majority of its revenue, $15.7 billion, or 76.6% of the total 2012 revenue, was generated from the Agricultural Equipment segment, while the Construction Equipment segment ranked second with $3.77 billion in sales.

In the past three years, CNH has experienced consistent growth in both top and bottom lines. Revenue has increased from $15.6 billion to nearly $20.5 billion whereas net income has climbed from $452 million to more than $1.14 billion in the same period. However, the company cash flow has been fluctuating in nature. Since 2010, its operating cash flow has fluctuated in the range of $994 million to $1.4 billion while free cash flow has decreased from $736 million to only $103 million. The lower free cash flow was due to higher capital expenditure for PPE and equipment on operating leases. In 2012, CNH spent $556 million for PPE, $50 million for software, and $476 million for equipment on operating leases.

CNH is trading around $43 per share with a total market cap of $10.5 billion. The market values CNH at 8.2 times EV/EBITDA. Interestingly, CNH is the cheapest when compared to its U.S. peers, Caterpillar (NYSE: CAT) and Deere & Company (NYSE: DE).

Caterpillar – a global leader in construction and mining equipment

Caterpillar is the global leader in construction and mining equipment gas turbines and diesel-electric locomotives, with the majority of its revenue derived from the Machinery and Power Systems segment. Recently, Caterpillar reported sluggish first-quarter results. Revenue declined 17.3% to $13.2 billion while net income experienced a free fall of 45%, from $1.58 billion, or $2.37 per share, in the first quarter last year to only $880 million, or $1.31 per share, this year.

The company said that normally, Caterpillar and its dealers often piled up their inventory in the first quarter to prepare for the higher demand throughout the year. However, Caterpillar had to reduce its inventory by $500 million, whereas last year, the company had increased its inventory by about $2 billion in Q1 2012.

Caterpillar is the biggest player in the construction and mining equipment industry with $58.3 billion in total market cap. The company is trading at around $89 per share. At the current trading price, Caterpillar has an expensive valuation at 9.13 times EV/EBITDA.

Deere has the highest EV multiple

Deere is also a big U.S. agricultural and construction company operating in three main business segments: Agricultural and turf, construction and forestry, and financial services. Most of Deere’s revenue, $27.1 billion, is generated from the agriculture and turf segment. This segment is also the biggest operating profit contributor with more than $3.9 billion in profit, while the construction and forestry segment only generated $476 million in operating income.

Deere has kept innovating itself. Some of its most powerful machines, including tracked feller bunchers and tracked harvesters, could increase customers’ productivity with “an updated boom strcture and cooling system for all models.”  Moreover, with the Rapid Cycle System, the boom operation could become much faster and simpler.

Neil Harber, the product marketing manager commented: “We're confident our customers will appreciate the higher productivity rates, increased uptime and lower daily operating costs with these improvements to the tracked feller bunchers and harvesters." Deere is trading at $92.30 per share with a total market cap of nearly $36 billion. The market values Deere at an expensive 10.57 times EV/EBITDA.

In terms of dividends, Caterpillar and Deere offer investors a similar dividend yield of 2.30% and 2.20%, respectively. CNH hasn’t paid any regularly dividends to its shareholders yet. In the middle of 2012, the company had paid a special dividend of $8.50 per share.

My Foolish take

CNH seems to be a good pick because of its lower valuation. Investors should consider both Caterpillar and Deere as well due to their decent dividend yield, the lowest valuation among peers, and global leading position in the construction and mining equipment industry.

Caterpillar is the market share leader in an industry in which size matters, and its quality products, extensive service network, and unparalleled brand strength combine to give it solid competitive advantages. Read all about Caterpillar's strengths and weaknesses in The Motley Fool's brand new report. Just click here to access it now.

Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!

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