The time to compare these four companies -- Agco Corp. (AGCO), Caterpillar (CAT), CNH Global (CNH), and Deere (DE) -- and their stocks is now. They all provide agricultural solutions on different levels; some rely more heavily on the agriculture sector, some have a presence in the construction sector, and they all have a financial arm to help them with sales -- with different strengths and weaknesses.
But this is not a SWOT analysis; this is a stock valuation showdown. I will solely focus on the financial statements these companies provide, along with metrics for comparison purposes, my interpretation of them, and, of course, the three methods used to value the stocks. You can find explanations of metrics in my prior article on valuation, as I will only provide results and interpretations in this article.
Key Trends for 2012:
Here are key trends, taken from CNH's 2011 20-F (PDF document):
- Demand in the agricultural and construction equipment markets is expected to remain positive for 2012.
- Agricultural equipment demand is projected to be flat to up 5% on the back of firm agricultural commodity prices.
- Construction equipment demand is expected to continue its recovery with industry retail unit sales expected to be up 15% to 20%.
- For 2011, worldwide industry retail unit sales of light construction equipment increased 30%, driven by improvements in residential and commercial construction activities.
- Heavy equipment industry retail unit sales increased 23% as a result of overall GDP growth.
Earnings per share for the industry are expected to be up 27.80% for 2012 vs. 2011. This input was shared across all four companies, with adjustments to every company (as expected by analysts following the stock).
1. DCF Valuation
There were three scenarios involved in this DCF valuation, along with a probability assigned arbitrarily by me to weight these scenarios:
Scenario | Probability | AGCO | CAT | DE | CNH |
Business as usual | 50% | $48.08 | $101.74 | $77.75 | $35.19 |
Positive Outlook | 25% | $96.25 | $139.50 | $147.86 | $62.32 |
Negative Outlook | 25% | $31.08 | $50.60 | $42.12 | $16.52 |
DCF target Price | $55.87 | $98.40 | $86.37 | $37.30 |
You can take these scenarios as a very wide trading range, and if Europe's crisis takes a turn for the worse -- or is not taken well by the market -- the "Negative Outlook" prices would come into play. If not, "Business as usual" price targets should be the ones you are looking out for.
2. Benjamin Graham's Formula
The sustained rate of growth for the next seven to 10 years in this formula was shared for all companies, and this was set at 10% (the impact is not very important).
Company | Graham Formula Share Value |
AGCO | $41.59 |
CAT | $84.65 |
DE | $76.24 |
CNH | $38.50 |
3. EBITDA X 7
Company | Share Value |
AGCO | $43.55 |
CAT | $76.39 |
DE | $86.79 |
CNH | $56.56 |
Average Value With the Three Methods and the Potential Upside
Company | Average Value | Current Price | Upside (Downside) Potential |
AGCO | $47.00 | $40.01 | 14.1% |
CAT | $86.48 | $87.17 | -0.8% |
DE | $83.13 | $73.27 | 13.5% |
CNH | $44.12 | $38.67 | 14.1% |
As you can see, the market seems to be underestimating AGCO's, DE's and CNH's growth in the next five years. But we will examine them further to see which ones have good reasons to be punished by Mr. Market, and which ones are being treated unfairly.
Out of these four stocks, only CAT seems to be fairly valued by the market so far.
Metrics War!
Now, let's review some important metrics for these companies.
Rentability and Capital Structure
Company | ROE (last 3 year average) | ROA (last 3 year average) | Liquidity: Current Ratio | Liquidity: Acid-Test Ratio | Capital Structure: Debt/Assets | Capital Structure: L.T. Debt/Assets |
AGCO | 11.2% | 4.9% | 1.66 | 0.95 | 58.7% | 19.4% |
CAT | 24.5% | 3.9% | 1.33 | 0.83 | 83.5% | 30.6% |
DE | 29.9% | 4.1% | 0.77 | 0.52 | 86.0% | 35.2% |
CNH | 5.1% | 1.1% | 1.38 | 1.14 | 76.9% | 25.3% |
As you can see, the industry's capital structure relies heavily on debt, most of it being current liabilities. The exception is AGCO, having a more regular capital structure and looking a lot healthier, with the least amount of debt and highest current ratio. The most levered company is DE, followed closely by CAT.
The Acid-Test Ratio leaves almost all of them exposed to a credit crunch, with DE being the weakest link in this case.
Winner: AGCO
Losers: CAT and DE
Regarding rentability on Equity and Assets, the tables turn, leaving DE and CAT as the best-positioned, especially since they have so little equity their returns magnify with leverage. ROA is more important to me, being a lot harder to manipulate and less prone to spikes.
Winners: AGCO and DE, followed closely by CAT
Loser: CNH's ROA is embarrassingly low at 1.1%.
Margins (Four-Year Average)
Company | Gross Margin | Cost of Sales/Sales | Operating Costs | Financing Cost/Sales | Net Margin |
AGCO | 18.2% | 81.8% | 12.8% | 0.5% | 4.2% |
CAT | 25.2% | 74.8% | 16.2% | 1.4% | 6.1% |
DE | 31.4% | 68.6% | 17.5% | 3.5% | 6.7% |
CNH | 23.1% | 76.9% | 15.0% | 4.6% | 2.7% |
AGCO has an 81.8% average Cost of Sales relative to Sales, but it makes up for it in its net margin, avoiding being the loser.
CNH looks terrible not only for being the worst in net margins, but it has the heaviest financing cost by far -- even when its Capital Structure is not very debt-heavy.
Worse still, CNH has been borrowing more and is not paying down debt, a red flag here.
Winner: DE, followed by CAT
Loser: CNH
Separating The Men From the Boys
Company | Piotroski's F-Score | Price/Book | EV/Sales Ratio | ROIC | WACC | Economic Profit (loss) |
AGCO | 5 | 1.20 | 0.60 | 13.75% | 9.8% | $148 million |
CAT | 6 | 3.66 | 1.55 | 8.71% | 8.98% | ($123 million) |
DE | 7 | 4.1 | 1.55 | 11.74% | 9.36% | $706 million |
CNH | 6 | 1.03 | 0.89 | 5.85% | 11.22% | ($1,181 million) |
I reviewed Piotroski's F-Score in my last article, so I won't go into it again, but they all look average in this department, DE being the winner by 1 point.
The most undervalued based on Price/Book and EV/Sales are AGCO and CNH.
Investors are paying $0.60 per every $1 AGCO makes in sales, and 0.89 for every dollar CNH makes in sales. CAT and DE are practically identical in this department; also considering Price/Book, investors seem to be very optimistic on DE and CAT.
I named this last part "Separating the Men From the Boys" because I compare the ultimate financial metrics to see if a company is using its Invested Capital efficiently to generate Economic Profit (same as EVA®) above its Cost of Capital (WACC).
We can clearly see why the market is not very fond of CNH, as it destroyed $1.18 billion last year, with a humiliating -5.37% spread between ROIC and its Cost of Capital -- the highest of these four stocks. This factor added to its razor-thin margins, making it the loser in my book.
We see why DE is loved by investors, earning $706 million in 2011. The spread, however, favors AGCO, with a 3.96% spread between ROIC and WACC. The bigger sales growth gets, the bigger the Economic Profits will get, ceteris paribus.
AGCO, as seen by the metrics in this article, looks as if it has some very bright people managing it and is run very efficiently.
Trade Ideas
Seeing how undervalued AGCO is by the market, going long $40 strike calls for February 2013 at 6.70 seems like a good idea. Or, if you want to play it safe, you could sell some $40 strike puts for February 2013 at $530 per contract. If you get assigned, your cost per share would drop to $34.70 -- not bad. If you keep the whole premium, $530 is your profit and $3,470 your required capital, so your ROI would be 15.27% in nine months.
CAT is a bit overvalued in my taste, seeing as it couldn't even meet it Cost of Capital. It is not in the same league as DE, as least not yet.
And the Winner Is…
Winner: AGCO (best of the four)
Runner-up: DE
Loser: CNH (worst of the four)
Price Targets
My price targets are for December 2012:
$47.00 for AGCO |
$86.48 for CAT |
$83.13 for DE |
$44.12 for CNH |
Standard & Poor's has a $70 12-month target for AGCO, based on 12.4 times their $5.65 EPS target.
Standard & Poor's has a $145 12-month target price for CAT, based on 14.9 times their $9.75 EPS target, the high end of the range.
Standard & Poor's has a $111 12-month target price for DE, based on 13 times their EPS target of $8.53, the high end of the range.
Standard & Poor's has a $41 12-month target price for CNH, based on 13 times their EPS target of $4.60.
If you have any doubts regarding the methods for DCF valuation, feel free to comment below. If you have doubts about the metrics, please consult my previous articles.
Disclaimer: I am not an expert in any of these companies, have no insider information, used each company's 10-K as my guide, and have treated this as a financial exercise only; a real/paid analyst will provide you with a target you are comfortable with -- I do not fight numbers.
