During the fourth quarter of 2012, Southeastern Management, a large mutual fund managed by billionaire Mason Hawkins, initiated a position of 1.5 million shares in CNH Global NV (NYSE:CNH), a $10 billion market cap manufacturer of farm and construction machinery (see more of Southeastern’s stock picks). The fund has continued buying stock in CNH Global NV (NYSE:CNH), with a recent 13G filing revealing that it now owns 3.7 million shares or a little over 12% of the total shares outstanding.
In the first quarter of 2013, CNH Global NV (NYSE:CNH) recorded a 21% increase in its earnings versus a year earlier. That’s certainly good news, but revenue was up only slightly over the same time frame. It’s unlikely that the company will be able to continue growing its net income slowly through improving its margins, and as a result we’d be skeptical about how sustainable this earnings growth will turn out to be unless the top line picks up as well.
Earnings multiples show CNH Global NV (NYSE:CNH) as quite cheap, with the current valuation placing it at 9 times trailing earnings. Wall Street analysts are projecting that earnings per share will rise modestly over the next several years, implying a forward P/E of only 8 and a five-year PEG ratio of 0.8. A number of other machinery related companies are trading at low multiples in the current environment, which we’d attribute to investor skepticism over macro conditions; demand for construction machinery, for example, is clearly dependent on the overall economy. This is shown by the fact that CNH carries a beta of 2.6.
We are able to see Southeastern’s holdings of CNH Global NV (NYSE:CNH) from the beginning of this year with our database of 13F filings from hundreds of notable investors, including hedge funds. We’ve also used our database to develop investment strategies; we have found, for example, that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year (learn more about our small cap strategy). Another major investor in CNH at the end of December was billionaire Mario Gabelli’s GAMCO Investors, which reported a position of 2.2 million shares (find GAMCO’s favorite stocks).