Wednesday, October 3, 2007

Still Not Enough Agriculture Exposure - Adding a New Name: CNH Global (CNH)

I still feel underexposed to the agriculture sector, so I decided to go away from fertilizer and add a name in the agricultural equipment sector. There are a couple of ways to play this from Deere (DE) to Agco (AG) to Komatsu (KMTUY) - the latter being the #1 holding in the Agricultural ETF MOO.

Per Marketocracy rules I am not allowed to buy Pink Sheet stocks which KMTUY trades on in the US (this is why I cannot own Nintendo (NTDOY) either), so that eliminates one possibility. Also Komatsu is a bit more of an "all purpose" stock more similar to Caterpillar (CAT) than Deere (DE).

I like what Agco (AG) is doing as a company, but it is a bit more narrow in focus with a heavy emphasis on tractors (not that that is a bad thing) but I need to do more homework before committing.

So this left me with Deere or CNH Global. I don't think you can go wrong with either, but due to market capitalization and relative valuation I decided on CNH Global, the Netherlands based company. Deere's market cap is $32 Billion whereas CNH Global is less than half that at $14 Billion. When given a choice of similar peers I always like the smaller company as its easier to grow quicker off a smaller base. To that end CNH has revenue of about $14 Billion this year, whereas Deere $23.5 Billion.

Both companies are in the sweet spot, and the ever shrinking value of the dollar is only going to help Deere export more product overseas. With that said, I think CNH might be more of an undiscovered gem, as everyone (and their mother) knows Deere.

Let's compare them simply by basic PE and PEG ratios for next year.
CNH is looking to grow earnings from $2.52 to $3.56, growing over 41%
DE is looking to grow earnings from $7.65 to $9.32, growing nearly 22%

CNH is valued at 23x 2007 estimates whereas DE is valued at 19x 2007 estimates.
CNH is valued at 16.3x 2008 estimates whereas DE is valued at 15.9 2008 estimates.

So looking out to 2008 I have 2 companies with similar valuations, but one (CNH) growing at twice the near term rate. (note: CNH is not quite the pure play agricultural play as Deere is due to some construction equipment exposure)

Long term these growth rates cannot be sustained for either company, but in the long run we will all be dead. Analysts still think these companies will only be growing 7-10% over the next 5 years - if that only increases to say 13-14%, analysts will have a lot of 'adjusting' to do in the upcoming years.

Now these companies "WILL" get hit when the inevitable shakeout happens in Brazil, China, India, etc (emerging markets) and those markets correct. The lemmings will scurry all over and tell you the boom times are over and apparently people will move back from the urban centers back to rural areas and want to give up the new middle class life. This will be silly thinking, but it can impact shares. But again, my theme in agriculture is much more longer term than that, so this fund needs more exposure in the area.

Technically, CNH Global has had a great year already, increasing from $37 to $58 from April to mid July. In the mid summer meltdown it dropped to mid $40s area, and has advanced smartly to a new yearly high of $64 a few days ago. It has now pulled back to $58 where I am beginning a stake in this name, as it nears its 20 day moving average of $57. I am hoping for a pullback to its 50 day moving average in the mid $50s to add more. I have started with a 250 share position or 1.3% stake in the fund. This brings the fund up to 59 names.

This group has enjoyed a huge run, so I'd not be surprised to see some digestion and backfilling in the coming months - but then again with the Fed party I suppose they could just keep going up week after week.... maybe if CNH changes its name to China CNH Global we could see a double by... Friday?

I view this name very similarly to Cummins Engine (CMI), a company based in the western world which is levered to growth in the developing world in big ways. For more about CNH Global take a look at their website. CNH Global is the 7th largest holding in MOO.

Long CNH Global in fund; no personal position

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