Company Tags: Kubota (KUB); Caterpillar (CAT); Deer (DE) Terex (TEX)
11:59 pm Edition…January 25, 2008 — Last Comment of the Day
The Irony of Globalisation…from Osaka, Japan to Gainesville, Georgia
Late night editions are rare. There wasn’t a convenient way to integrate this overseas public company into earlier editions. Our research staff introduces Kubota Corporation (KUB: $32.25), an Osaka, Japan-based manufacturer of engines, machinery & equipment and other industrial products. Kubota is an old-line Japanese company (founded 1890) with a 21st-century dynamic. It is an irony of globalization that 20% of KUB’s employees work in the USA.
US Agricultural exports are up 28%…so we trolled in the farm sector for some ideas, beginning with Caterpillar (CAT: $65.25) and Deere (DE: $82.59). Many farmers in this sector started buying smaller equipment to increase yields. We discovered this space was Kubota’s specialty, and they outsell Caterpillar and Deere. Japan-based Kubota has had a US subsidiary (Kubota Tractor, Torrance, California) making farm equipment since 1972. Since then, two other Kubota units have opened in the USA: Kubota Manufacturing (1988) in Georgia (lawn tractors, mowers and other implements) and Kubota Engine in Illinois (compact engines for agriculture & industry).
http://finance.yahoo.com/q/co?s=KUB – This links to a Yahoo Finance table that compares Kubota (KUB: $32.25) to Caterpillar (CAT: $65.25) and Deere (DE: $82.59). Referring to that table, Kubota is 25% the size of Caterpillar…25% of the employees, about 25% of revenues, even EBITDA is proportional. Operating margins are not, however.
Kubota has a Market Value of $8.7 Billion, 21% of Caterpillar’s Market Value. However, KUB’s operating margins are close to 12%, better than the margins at both Caterpillar and Deer; at 11%. KUB’s Gross Margins are also better than CAT and DE. Finally, as a Balance Sheet benchmark, Debt-to-Equity, Kubota has total long term debt equal to only 40% of equity versus long term debt at Caterpillar and Deere that is a whopping 2 to 3 times equity.
Research embraces the optimistic outlook for American equipment manufacturers like Caterpillar and Deere. Indeed, institutional ownership is 82% of Deere and 66% of Caterpillar. Now, check out the number of analysts following each company…somewhere between 15 and 20. There seem to be a number of vested interests to keep the stock prices of CAT and DE at present levels.
BEWARE: Caterpillar and Deere remain at lofty price levels, even in this bearish market — we anticipate selling pressure as analysts gradually assess debt levels of industrial companies in an imminent credit-challenged environment.
Kubota, on the other hand, seems the safer play in this sector, a growing one. KUB also serves as an example of a stock meeting Growth at Reasonable Price criteria (GARP), meeting 2 of the 6 GARP criteria: (i) Its P/E is less than those in its peer group; (ii) operating margins are at least as good as its peers. These two criteria alone can keep an investor from a lot of financial heartache.
For the Model Portfolio, we put our money in 100 shares of Kubota, or $3,275 including transaction costs. No off-setting short sale in Deere or Caterpillar, however. Those two stocks are so heavily-owned by institutions, outright disposal is unlikely. We don’t see those stocks moving much…unless their debt loads start to attract attention. The graph below illustrates this foregoing investment point of view. A picture, like the graph below, says a 1,000 words, or in this case, 567.
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