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.
Stock AnalysisHere are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
InvestingThe further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
Fundamental AnalysisOptions market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
Stock AnalysisCan these two oil stocks buck the trend?
Investing NewsAlcoa plans to split into two companies. Is this a bullish catalyst for investors?
Stock AnalysisIf you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
Investing NewsA rate hike would certainly alter the investment scene, but would it be for the better or worse?
Investing NewsWith market volatility high, you may think it is time to run for corporate bonds instead of stocks. Before you do take a deeper look into which is better.
Mutual Funds & ETFsInstead of selling your stocks to get gains, consider a short selling strategy, specifically one that uses short ETFs that help manage the risk.
Investing BasicsDiversifying with international stocks can benefit most portfolios, but beware of country risk.
When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
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 >>
A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
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 >>
The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>