Equipping Growth: Agricultural and Construction Mammoths
Vanina is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Since a very early age, combines and tractors surrounded my life. My dad is a farming contractor; grandpa was too. That is how I came to meet Deere (NYSE: DE), Caterpillar (NYSE: CAT), and CNH (NYSE: CNH), or at least their predecessors. The introduction of the RR soybean, and no-till farming drove the demand for agricultural products the last decade. Mining on the other hand, continues to depend only from commodity prices.
Commodity prices do not affect loyalty
In the Pampa, Argentina, Deere’s combine harvesters and tractors are well known for their reliance, durability, and resale price. In addition to agricultural products, the company produces and markets construction and forestry equipment. At last, a financial service has been integrated to the business model. Recently, the second quarter report has shown further performance improvement.
At the moment, Deere’s attention is occupied with the effects on the agriculture and forestry segments due to the European slowdown. Also, higher import taxes in Russia, Kazakhstan, and Belarus may negatively impact sales. Ahead, a recovering non-residential construction market, and a favorable highway bill, will drive demand for construction equipment, as this blog explains. Also, the company holds 50% of the US market while continuing to permeate foreign markets.
Through the last decade, revenue, net income, and cash flow have seen increments. This last indicator, however, took a dive last year. On the other hand, operating margin stood in the low teens during the same decade, and long-term debt duplicated. All in all, the balance sheet is strong with most indicators above the industry average.
Currently trading at 10.3 times its earnings, carrying a 5% discount to the industry average, a yield of 2.30% and dividends at $0.51, and a price tag in the middle of its 52-week range, the stock is fairly valued and tempting. It is recommended to buy because Deere’s strong brand and market presence, backed by a solid business structure, have secured a prosperous future.
Second to all
CNH, based in Illinois, is the product of the merge between Case and New Holland. Like Deere, the firm produces and markets construction and agricultural equipment - the last segment being the most important for the business model. Recently, the firm made the tabloids in relation to a new merger, this time with Fiat.
Now, CNH’s attention is driven towards the tractor segment due to a loss of market share in Latin America, shifting market preferences in India, and less credit availability in Russia. The impact of these catalysts may be eased by an increasing presence in developing markets. However, to complicate the matter further, competition in the US continues to increase around the agricultural segment, and the construction segment struggles to put a real fight against giants Caterpillar and Komatsu.
The balance sheet for CNH is modest. Revenue and net income have seen progressive increments in the past year. During the same time, cash flow did not find its upward trend, or stabilize at reasonable levels. Operating margin also described an unstable pattern while always remaining above 5%, and standing today at 7%. Debt, on the other hand, has seen progressive increments putting a question over the firm’s future prospects.
Trading at 8.8 times its earnings, pulling a 20% discount to the industry average, and a price tag in the middle of the 52-week range, the stock is fairly priced. It is recommended to hold until the merger with Fiat is complete and assessed before making a long-term investment.
The stagnated caterpillar
Similar to Deere, Caterpillar also started in the agriculture business. Later, the firm expanded into the construction, engines, electronics, and financial. However, today it is most known for being the number one construction equipment firm. Additionally, the company’s first quarter report shows some difficulties meeting growth objectives.
Today, Caterpillar is wrestling with economic uncertainty in Europe, a relative year-to-year decline in backlog orders, and a lower demand in the mining segment. Also, the firm will complete the integration of Mining Machinery, and adjust inventory. For tomorrow, the company wishes to continue improving its service sector, and benefit from the recovery of the US economy – where it holds the dominant position.
Total revenue, net income, and cash flow have all experienced increments during the past decade. Last year, however, indicators took a small dive amid difficulties in the European market. Long-term debt, during the same decade, has progressively increased without reaching worrying levels. Last, operating margin sits one point below the industry mark of 12.7%.
Trading at 11.8 times its earnings, packing an 8% premium to the industry average, yielding 1.78%, paying a $0.52 dividend, and a price tag in the middle of the 52-week range, the stock is fairly valued. It is recommended to hold until Caterpillar improves performance since revenue and EPS continue to decline, and no further expansion of the Brazilian construction market is expected.
Tilling vs. Caving
Sure, the farm industry is at the mercy of the weather, something mining is not as exposed to. But the required capital to start a mining business is much greater than that required to start a farm business. Hence, the barriers to the agricultural industry are much lower. That is the reason for which there are, and there will be many more farmers than miners.
Such healthy competition within the agriculture market will push for equipment renovation pushing the demand. I prefer Deere and CNH to Caterpillar, and Deere to CNH because of its dominant market position and customer loyalty.
The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.
Vanina Egea 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!