This Stock Looks Like a Value Buy Now

Agriculture players have been riding high. They are making it big despite the overall sense of economic gloom.

How could CNH Global (NYSE: CNH  ) then not do well when demand for farm equipment is rising globally? The farm and construction equipment maker upgraded its full-year margins outlook after reporting a robust second quarter. This has encouraged me to take a better look at the company and help Fools decide whether the stock looks like a valuable pick now.

Operational performance
Demand for farm equipment has increased tremendously with soaring crop prices and higher farming activity. Moreover, markets such as Asia and Latin America are also driving demand for construction equipment. These factors have boosted CNH's revenue by 18.6% over the past year. Compare this with a five-year rate of 5.9%, and the acceleration is impressive.

What's astounding is the bottom-line growth the company clocked last year. From a five-year rate of 27.8%, CNH's net income has grown at a whopping rate of 368.7% in the past 12 months. Whew!

Growth and stability
CNH launched several new products in both the agricultural and construction equipment segments last year. The company has also been expanding production capacities.

CNH has been increasing its presence in emerging markets. Early this year, CNH invested in an India-based company to set up a stronger construction equipment manufacturing base in the country. It has also planned to set up a manufacturing site in Argentina to cater to the Latin America market.

The company has extended its alliance with GPS technology player Trimble Navigation (Nasdaq: TRMB  ) for more advanced agriculture solutions and innovative products.

However, such investments and expansion moves have taken CNH's debt-to-equity ratio to a very high level of 203%, which could be a concern. Cash equivalents stand at $949 million, though the company has around $3.4 billion worth of liquid short-term investments. Interest coverage of 2.2 times and an unlevered free cash flow balance of $1.3 billion as of June 30 provide some comfort. The company is also not paying dividends, which saves some cash.

Value insights
But is CNH cheap when valued next to its peers? Let's take a look:

Company

Trailing P/E

Forward P/E

P/S

P/B

CNH Global 12.1 7.7 0.39 0.82
Deere (NYSE: DE  ) 11.7 9.6 0.94 3.74
Caterpillar (NYSE: CAT  ) 14.0 9.8 0.94 3.64
AGCO (NYSE: AGCO  ) 10.7 8.5 0.42 1.12
Terex (NYSE: TEX  ) NM 9.3 0.23 0.55

Source: Capital IQ, a division of Standard & Poor's.

CNH seems fairly priced on a trailing P/E basis. But with earnings expected to grow, its forward P/E drops off dramatically. This future potential has not been factored in the stock price, indicating a possible upside for CNH.

Moreover, currently the stock is trading at just 0.39 time its sales, and 0.82 time its book value. It's certainly looking like a value pick right now.

The Foolish bottom line
CNH's bottom-line growth has been superb, and its investments in expansion and product additions are impressive, too. The company might not be paying dividends, but with such cheap valuations, and the stock trading close to its 52-week low, CNH could provide nice returns. Keep an eye on this stock, Fools.

Click here to add CNH to your stock watchlist.

Neha Chamaria does not own shares of any of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 07, 2011, at 2:28 PM, MHedgeFundTrader wrote:

    I am bailing on my long position in the Caterpillar (CAT) January, 2012 $110 calls. I think there is a snowball’s chance in hell that the stock will make it back above $110 or more by the January 21 expiration. Therefore, I have to salvage whatever time premium I can before it goes to money heaven. In fact, it might even be worth going short a few of these calls, if your inclination is to pick up pennies in front of the bulldozer.

    I went into this trade with all the best intentions. I still love the company fundamentals for the long term, as its sales are still rising at well into double digit rates. But if there are fears of a slowdown in China, this is definitely a stock you do not want to own. Caterpillar shares also got blindsided by the meltdown in copper, which pared a stunning 35% off its yearly high in a heartbeat.

    I also turfed this out of my trading book because, quite frankly, I was getting sick of looking at it. This trade was leftover from July, when we were living in a distant, more equity friendly world. This was before the Tea Party threatened a Treasury bond default, and Standard & Poor’s downgraded them anyway, triggering the current collapse in confidence.

    Chalk it all up to a lesson on the value of using limited risk positions to control your risk in a trading book. My loss on this trade came to 4.81% of the total portfolio value. The options capped my maximum loss at 5%. Stop losses also showed their worth, which I woefully ignored in this case, much to my own expense.

    I don’t like being reminded of my mistakes any more than the next guy, so it is hasta la vista, baby, to the Caterpillar calls. I live in a world of instant gratification, so it is on to the next one. Anyway, with 18 consecutive profitable trades under my belt over the past two months, I am now well ahead of the curve.

    I do make mistakes. For the perfect track record you have to go to that other more expensive mentoring service down the street with the flashing neon lights and those aggressive, sexy touts offering the perfect track record. By the way, that track record is fake.

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