The Best Under-Rated Play in the Agri Market
Marshall is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The outlook for the farm-machines and construction industry has been a mixed bag over the past couple of years. One of the big names dragging down the entire heavy-equipment industry has been Caterpillar. The company's poor performance due to slowdowns in China and in the mining sector has led to a sell-off of the entire industry. However, I would argue that CAT's problems in mining, or even China, have little to do with the global agricultural market. As a result, I'm still bullish on agricultural-equipment makers and the industry in general.
The big tailwinds? The major agricultural-equipment makers should be big benefactors of the increasing urbanization of emerging economies. And CNH Global (ADR) (NYSE: CNH) could be one of the best bets because of this.
Why? CNH posted 2Q EPS of $1.93, compared to $1.47 for the same period last year, well above the $1.50 consensus. One of the big reasons I'm a CNH fan is that the stock trades at 7.2 times operating cash flow and has a return on equity of 15%.
CNH is the result of the '99 merger between New Holland and Case. The company has a large global footprint, with 44% of its construction and agricultural equipment sales generated in North America in 2012, 31% in EAME, 15% in Latin America, and 10% in Asia.
CNH's agricultural segment makes up over 80% of revenue, and includes tractors, combine harvesters, and seeding and planting equipment. Its key brands include Case and New Holland. Meanwhile, its construction segment makes up 20% of revenue and includes wheel loaders, dozers, backhoe loaders and excavators.
Deere (NYSE: DE) remains the world's largest maker of farm tractors and combines. The company is expected to post revenue growth of some 8% in fiscal 2013. Much like CNH, Deere expects the strengthening farming market to be one of the biggest tailwinds.
During 2012, the company got around 40% of sales from outside North America. Its agricultural segment accounts for 75% of sales, while its construction and forestry segment is 18% of sales.
The thing that gets Deere investors excited is its 2.4% dividend yield; while not exorbitant, it's still well above the dividend other agricultural-equipment makers offer. The dividend is also only a 25% payout of earnings.
AGCO (NYSE: AGCO) is another major farm-equipment maker. Just like CNH and Deere, the June-ended quarterly EPS was up nicely year-over-year, coming in at $2.15, compared to $2.08 from the same period last year, after sales were up 13% year-over-year.
AGCO sells a full line of equipment, from tractors to combines. The company has over 3,100 independent dealers and distributors in more than 140 countries. Tractors make up nearly 60% of the company's sales. But the issue for investors is the 50% in revenue the company gets from Europe. This could prove to be a continued drag on AGCO going forward. But worth noting is that nearly 20% of sales come from the fast-growing area of South America.
While the urbanization of emerging economies will be one of the biggest long-term tailwinds for the likes of Deere and CNH, a notable near-term tailwind includes the delayed planting season that should lead the industry to begin a game of catch-up. The unseasonably wet spring has delayed crop planting, but as farmers look to catch up, they will likely turn to the big machines that can sow quickly.
Emerson Nafziger, agronomist at the University of Illinois, notes that "when you see big planters running fast, they're certainly planting eight or 12 times faster than we planted 30 years ago."
One of the beauties of CNH is that it trades the cheapest among the major equipment makers:
But the story gets better. When you couple the growth rates with CNH's cheap valuation, the stock is an all around growth at a reasonable price opportunity:
CNH is my newest pick for the agricultural industry. I think that Deere could also be a solid industry bet, namely because of its brand's land and market share leadership. And AGCO is one of the other underrated plays in the industry, but its dividend isn't quite as robust, at only 0.4%.
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Marshall Hargrave 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!