Street Underestimating Ag. Equipment Maker CNH Global's Forward Earnings

My favorite company within the agricultural equipment industry is Amsterdam-based CNH Global (CNH). CNH has seen its stock price cut in half since it peaked on January 3rd. Although it has broad exposure to construction equipment, the company is seeing massive demand for its high priced agricultural equipment.

CNH is coming off of its best quarter in company history. Consolidated revenues were up 26%. Net income increased 18%. Their equipment operations operating profit was up 21%. Diluted EPS was up 20%. They also confirmed their 2008 outlook of $3.30 to $3.60 per share.

If we break down the numbers you will understand why the long term benefits for owning this company could be quite large. Quarter over quarter, tractor and combine sales were up 2% from 2007. Outside North America tractor sales were up 5%. Large tractor sales in North America were up 30%. Most importantly were combine sales, as they were up 40% worldwide. Market share for world tractor sales increased and combine share increased in Latin America and Western Europe. Combine sales share increased while the total revenue in this division was up 55%. Combine sales to Latin America alone were up 84%.

It seems that much of the selloff, with respect to CNH shares, has to do with the slow down in North America. Even with North American construction equipment sales down 24% in light equipment and 28% in heavy equipment, CNH still saw a world increase of sales of 17% and 29% respectively. The company has seen positive pricing improvements in all areas except North American light construction equipment. These improvements have moved CNH to invest $88 million in improving company price efficiencies. These investments should improve margins going forward.

2008's outlook seems quite good. Large tractors, although projecting sales to be down in North America, look to have growth in sales by up to 6% for the current year. This growth will be driven by Latin America, where sales are estimated to increase from 20% to 26%. Worldwide combine sales are estimated to increase 20-25%. Light construction equipment is estimated to grow up to 5% and heavy construction equipment by 5-10%.

Looking at these earnings and equating them to the current stock price has the PE at 11.9 and forward PE at 7.05. Analyst estimates have next quarter's earnings up 37.1% and full year earnings up 30.8%. Next year's earnings growth are currently estimated to be 20.6%. Over the last five years, this company has grown 32% per year, while analysts have the company only growing 8% for the next five. Even if this growth number is correct, the company is only selling for a five year PEG of 1.07.

The reason I believe these forward estimates to be too low has to do with the US economy. I do not believe that much will get done to benefit the US until the election is done. In 2009, I do believe that the economy will improve as the situation with energy infrastructure is addressed. I believe that plants based on natural gas and nuclear will be started at that point giving the economy a boost. This should help sales of construction equipment from 2009 through approximately 2013. As this is occuring, farm and construction equipment sales should continue to grow. Look for CNH to hit the top end of earnings for 2008.

Disclosure: Long CNH as well as POT, IPI and MON.

Comments

[StockBoy2]

I also am long CNH. Interesting enough, I also own DE, POT, MOS, MON, IPI, RIG, and RIO, amoung others. CNH suffers from New York, Wall Street, American bias. The market just doesn't pay attention to European Stocks. Few people in the USA know Case or New Holland. If they had continued to use the INTERNATIONAL HARVESTOR name, a household word in Ohio, Indiana, Wisconsin, and on through Kansas,Texas and Montana, the agricultural giant that would be better know. At less than $30.00 a share I am still buying.

2008 Jul 14 11:57 AM

[QUESTIONABLE]

Manufacturer's of Agricultural Equipment are seeing record sales in emerging nations such as South America. The reason North American Sales are down is due to "Market Saturation." There is a New Tractor, Lawn Mower, Implement or even just a piece of equipment on every Farm. With the Mortgage and real estate bust you have 25% of the total financed equipment being thrown back into the sales market at really low costs. World wide sales increases for these companies should also be a sign to Americans that oil is not at $150 a barrel but around $50 a barrel, and that this Artificially inflated price per barrel of oil is the result of a mismanaged and un-needed Speculation Market. To say that it was created to allow fleet companies and air lines to purchase oil at a low price in bulk prior to a price increase is a joke. I don't think Delta or JB Hunt own their own refinaries or take direct delivery of the oil. Only about 3 percent of a barrel of oil comes out distilled as Jet Fuel and 25 percent diesel...... This is all a shake down from ENRON and those that were involved with it's creation are still in Washington..... Mr. Graham (advisor to McCain) whose wife headed the CFTC under Bush Senior, and on the CLinton Inaugeration day went to work for ENRON as a Vice President signed the creation of this Monster into existance on her last day at the CFTC. So, don't count your chickens until you see if McCain wins and puts these Graham back into play to re-invent this Monster.

2008 Jul 14 03:46 PM

[legmaker]

QUESTIONABLE, I dont even think you were commenting on my article. Ag equipment sales in North America are not down they are up. Just wondering if you know anything about farms, the majority of the time they do not trade in their tractors, harvestors, combines, they add equipment to get their crop in and out of the fields faster improving their yield and increasing productivity. Just for your knowledge, there is no such thing as market saturation with respect to farm equipment. The American farmer has survived on subsidees and finally have enough cash to reinvest. Lastly, send your email to a politician, we are here to make money, not elect a president. If you ever have anything correct or with at least a small amount of knowledge, everyone here would love hear it, otherwise go read a book and quit blaming everyone else for your problems. Lastly, CNH is a buy, if you would have read the article you would have found that out.

2008 Jul 14 10:15 PM

[QUESTIONABLE]

I work in the industry very closely.... you should reconsider your position.... when a $150,000 combine has ran through three years it is at the end of it's service life... these large pieces aren't even purchased.... they are leased and leases are not accounted for sales in North America... while on the lease programs farmers must insure them.... have you caught the news lately on how many NEW leased combines were caught in the mid west flood?? As for other equipment Farms are downsizing due to suburban spraw.... and have you went to a tractor/equipment dealership and questioned the average repair cost and did the math on multiple repairs verse Trade In Value? Unlike Cars Equipment retains a higher Trade in value. When Sales are down the New Unit Price is lower and thus can offset long term investment in repairing a used piece of equipment. Broke Down Equipment can means crop looses. To trade in equipment can cut up to 50% off of the sale price of a newer replacement with warranty. I think you have been watching too many commercials from my Industry. These companies are a good buy... no one ever stated they weren't... but you need to do more research on the Nort American Markets and take a College level class on the affects of population explosions on the economy.... The Roman Empire was a prime example... The Richer the centralized geographical area got the more they moved their Labor and Manufacturing out of those areas, the cost of goods went up, and when Rome was attacked from different angles it lost these resources and could not survive... sounds like America doesn't it.

2008 Jul 15 11:20 AM

[googoo]

Yep! Insiders are saying the Ag market in the US is done. But your point about looking Global is a good one. I would buy CNH cause it is so cheap right now but wouldn't look for it come up as it did where last year it was up 130%. But that was crazy anyway, now wasn't it. Input costs are too high now for the margin to be that great.

2008 Jul 18 10:09 AM

[QUESTIONABLE]

The thing about AG markets is just like the crops it comes in seasons. CNH is not just AG though it also has to include numbers for it's holdings in Construction Machinery. This is true of all the major equipment manufactuers.... where housing and construction is down in the United States, some sales are boosted by the Iraq Conflict as the regrowth there pushes in new purchases for both Construction and AG... Alot of AG equipment is dual mode and meets both needs. Just research the actual sales numbers by geographical area and learn about the crops and growing seasons. These true natural seasons will affect the stock prices.... As I am not giving anything but common sense knowledge and will not recommend or point toward a specific action as I disagree with this type of hype that is already destroying retirement investments.

2008 Jul 23 04:40 PM

[legmaker]

Sorry you didnt like the article. God Bless


On Jul 23 04:40 PM QUESTIONABLE wrote:

> The thing about AG markets is just like the crops it comes in seasons.
> CNH is not just AG though it also has to include numbers for it's
> holdings in Construction Machinery. This is true of all the major
> equipment manufactuers.... where housing and construction is down
> in the United States, some sales are boosted by the Iraq Conflict
> as the regrowth there pushes in new purchases for both Construction
> and AG... Alot of AG equipment is dual mode and meets both needs.
> Just research the actual sales numbers by geographical area and learn
> about the crops and growing seasons. These true natural seasons will
> affect the stock prices.... As I am not giving anything but common
> sense knowledge and will not recommend or point toward a specific
> action as I disagree with this type of hype that is already destroying
> retirement investments.

2009 Jan 18 01:52 PM