Mason Hawkins, the talented mind behind Southeastern Asset Management, has nearly $23 billion in total assets under management. On May 10, he increased his stake in CNH Global NV (NYSE:CNH) by more than 150% to 3.7 million shares. In the past twelve months, CNH Global NV (NYSE:CNH) has exhibited a tepid stock price performance, declining more than 2.6% while the S&P 500 gained more than 10.7% during the same period. Should we follow Mason Hawkins into CNH Global NV (NYSE:CNH)? Let’s find out.
Fast growth in the past three years
CNH Global NV (NYSE:CNH), based in the Netherlands, is involved in both agricultural and construction equipment industries, operating in three main business segments: Agricultural Equipment, Construction Equipment, and Financial Services. The majority of its revenue, $15.7 billion, or 76.6% of the total 2012 revenue, was generated from the Agricultural Equipment segment, while the Construction Equipment segment ranked second with $3.77 billion in sales.
In the past three years, CNH Global NV (NYSE:CNH) has experienced consistent growth in both top and bottom lines. Revenue has increased from $15.6 billion to nearly $20.5 billion whereas net income has climbed from $452 million to more than $1.14 billion in the same period. However, the company cash flow has been fluctuating in nature. Since 2010, its operating cash flow has fluctuated in the range of $994 million to $1.4 billion while free cash flow has decreased from $736 million to only $103 million. The lower free cash flow was due to higher capital expenditure for PPE and equipment on operating leases. In 2012, CNH Global NV (NYSE:CNH) spent $556 million for PPE, $50 million for software, and $476 million for equipment on operating leases.
CNH is trading around $43 per share with a total market cap of $10.5 billion. The market values CNH at 8.2 times EV/EBITDA. Interestingly, CNH is the cheapest when compared to its U.S. peers, Caterpillar Inc. (NYSE:CAT) and Deere & Company (NYSE:DE).
Caterpillar – a global leader in construction and mining equipment
Caterpillar Inc. (NYSE:CAT) is the global leader in construction and mining equipment gas turbines and diesel-electric locomotives, with the majority of its revenue derived from the Machinery and Power Systems segment. Recently, Caterpillar Inc. (NYSE:CAT) reported sluggish first-quarter results. Revenue declined 17.3% to $13.2 billion while net income experienced a free fall of 45%, from $1.58 billion, or $2.37 per share, in the first quarter last year to only $880 million, or $1.31 per share, this year.
The company said that normally, Caterpillar Inc. (NYSE:CAT) and its dealers often piled up their inventory in the first quarter to prepare for the higher demand throughout the year. However, Caterpillar Inc. (NYSE:CAT) had to reduce its inventory by $500 million, whereas last year, the company had increased its inventory by about $2 billion in Q1 2012.
Caterpillar Inc. (NYSE:CAT) is the biggest player in the construction and mining equipment industry with $58.3 billion in total market cap. The company is trading at around $89 per share. At the current trading price, Caterpillar has an expensive valuation at 9.13 times EV/EBITDA.
Deere has the highest EV multiple
Deere & Company (NYSE:DE) is also a big U.S. agricultural and construction company operating in three main business segments: Agricultural and turf, construction and forestry, and financial services. Most of Deere & Company (NYSE:DE)’s revenue, $27.1 billion, is generated from the agriculture and turf segment. This segment is also the biggest operating profit contributor with more than $3.9 billion in profit, while the construction and forestry segment only generated $476 million in operating income.
Deere & Company (NYSE:DE) has kept innovating itself. Some of its most powerful machines, including tracked feller bunchers and tracked harvesters, could increase customers’ productivity with “an updated boom structure and cooling system for all models.” Moreover, with the Rapid Cycle System, the boom operation could become much faster and simpler.
Neil Harber, the product marketing manager commented: “We’re confident our customers will appreciate the higher productivity rates, increased uptime and lower daily operating costs with these improvements to the tracked feller bunchers and harvesters.” Deere & Company (NYSE:DE) is trading at $92.30 per share with a total market cap of nearly $36 billion. The market values Deere & Company (NYSE:DE) at an expensive 10.57 times EV/EBITDA.
In terms of dividends, Caterpillar and Deere offer investors a similar dividend yield of 2.30% and 2.20%, respectively. CNH hasn’t paid any regularly dividends to its shareholders yet. In the middle of 2012, the company had paid a special dividend of $8.50 per share.
My Foolish take
CNH seems to be a good pick because of its lower valuation. Investors should consider both Caterpillar and Deere as well due to their decent dividend yield, the lowest valuation among peers, and global leading position in the construction and mining equipment industry.
The article Should We Follow Mason Hawkins Into This Stock? originally appeared on Fool.com and is written by Anh HOANG.
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