There's a lot working in Kubota's (OTC:KUBTY) favor these days. The lower value of the yen makes its products cheaper, while rising incomes across Asia make its agricultural equipment more attainable. Add to that a recovery in the U.S. housing market (where the company sells a lot of lawn equipment) and a stated goal to expand the dry land business, and there are multiple attractive growth drivers. The problem? It's just not possible to run an attractive valuation on a discounted cash flow basis, and I can't reconcile the idea of paying a 40% to 100% premium (in forward EV/EBITDA terms) for Kubota compared to Cummins (NYSE:CMI), Deere (NYSE:DE), AGCO (Nasdaq:AGCO), or CNH (NYSE:CNH).
A Growing Presence In Asia
Kubota gets about two-thirds of its revenue from agricultural equipment (nearly 90% of which is tractors), with another quarter coming from pipes, pumps, and valves used in municipal water businesses and about 10% from construction equipment. While the water business is a different twist, the split between agricultural and construction equipment should be familiar to investors who know Deere and CNH.

SEE: Deere Benefits From Strong Farming
While about one-third of Kubota's ag business comes from Japan, a growing portion is coming from the rest of Asia as rising farmer incomes make Kubota's superior equipment more accessible. Thailand is a major market for the company today (and a major exporter of rice), while countries like China and Indonesia are only just starting to emerge as real opportunities.
In North America, Kubota has market-leading share in small (<40 HP) tractors, but only about 20% of sales go into the agricultural sector. Far more important is the homeowner market, as about 50% of Kubota's sales are to homeowners with above-average incomes in the form of lawn equipment (riding lawn mowers and so on).
Looking To New Businesses For Growth
One of the key long-term plans for Kubota management is to grow the company's presence in dry-land agriculture. Only about 5% of the company's North American sales go to grain farmers, and worldwide the amount of land devoted to dry-land crops is about seven times that of rice.
How the company will get there has yet to be fully determined. Kubota is entering the large tractor market (100HP+) and the company has made gaining share in the 40+ HP categories a priority, but Deere has considerable market share here. Kubota may also look to leverage its past acquisition of Kverneland, a European manufacturer of dry-land equipment for plowing, cultivation, seeding, spraying/spreading, and so on. 
Part of the challenge is scale and credibility. Kubota just doesn't have any reputation or track record with North American farmers in equipment like combines, and the size of the purchase involved makes that a much more challenging sale. What's more, while management has talked about spending up to $2 billion on deals to accelerate the process, it would take a lot more than that to secure a deal for a company like AGCO or Claas.
Several Attractive Drivers
All told, there is a lot to like about Kubota today. As farm incomes in Indonesia, China, and Vietnam improve, Kubota should see meaningfully higher equipment sales (machinery makes up only about 20% of Asian farming capital stock right now). What's more, outsourcing production to markets like Thailand and China should also help the company's margins.
Outside of Asia, the move to dry-land agriculture should significantly expand the company's addressable market and revenue potential, even if it is likely to require years of investment. Last and not least, it looks like the U.S. housing market is on healthier footing, with both Home Depot (NYSE:HD) and Lowe's (NYSE:LOW) recently reporting strong sales of outdoor powered equipment.
The Bottom Line
Unfortunately, all of that opportunity needs to be put in the context of valuation. Even if I forecast significantly higher growth rates for Kubota compared to Deere, the discounted cash flow model just doesn't work.
Now, it's not all that uncommon for Japanese stocks to look expensive by DCF, but the EV/EBITDA analysis isn't much better. You have to be willing to pay almost 9.5x FY15 EBITDA just to match today's price on Kubota shares, and that 40% to 50% more than you would pay for Cummins and CNH, and almost double would you would pay for Deere and AGCO.
I'm willing to support the argument that Kubota has more appealing growth prospects than Deere and less near-term risk. But I'm not nearly so willing to say that it's a good idea to pay twice as much on an EV/EBITDA basis for the shares.
Disclosure – At the time of writing, the author did not own shares of any company mentioned in this article.

Related Articles
  1. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  2. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  3. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  4. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  5. Investing News

    These 3 High-Quality Stocks Are Dividend Royalty

    Here are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
  6. Stock Analysis

    An Auto Stock Alternative to Ford and GM

    If you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
  7. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  8. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  9. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  10. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!