In the past I've written good things about Deere & Company
) and CNH Global
), but to the best of my recollection, nothing about the Japanese maker of combines and tractors, Kubota
). I suspect my prejudice is based on the yen's 50% appreciation over the last five years against major currencies, which has made life very difficult for Japanese exporters. Despite this harsh reality, Kubota still makes an interesting investment. Here are three ways you can play it.
This is the most obvious and direct way to participate in Kubota's future growth. Business has been reasonably strong in fiscal 2012 with revenues expected to increase by 7.1% to $12.5 billion, operating income
by 16.1% to $1.25 billion and net income by 9.4% to $750 million. These are all solid, if not spectacular numbers. Deere's full-year numbers were clearly much better, increasing revenues by 23% year-over-year to the end of October 2011, with operating income up 34% and net income up 50%. While Kubota obviously has a long way to go to match Deere's success, its third quarter report reveals some healthy signs for the future; three that stand out for me include a 38% increase in construction machinery revenue year-over-year, a 19% increase in its North American revenues and an even more impressive 19% increase in European sales.
In mid-December, Kubota announced it was acquiring 79% of Norwegian farming equipment maker Kverneland Group for $220 million. At less than 0.5 times sales, Kubota adds almost $600 million in revenues, much of it in Europe. The company's goal is to generate at least 70% of its revenue outside Asia within five years. It currently sits around 35%. To further its expansion, Kubota's in talks to acquire an overseas farm equipment manufacturer, with a reputed price tag of $2.6 billion. With $1.3 billion in cash and a debt-to-equity
ratio of 40%, Kubota will have more than enough to make it happen. Given the appreciation in the yen, acquisitions seem like the best way to make inroads overseas. You have to make hay when the sun shines.
ETF # 1
Although Kubota is flexing its muscles outside Japan, it's still not in the same league as Deere. Therefore, it might make sense to own an agribusiness ETF
that holds both stocks. The fund to help you achieve this is the Market Vectors Agribusiness ETF
), which replicates the performance of the DAXglobal Agribusiness Index. With 46 holdings including Deere (7.24% weighting) and Kubota (3.56% weighting), it also has some of the commodity growers like Monsanto
) and Potash Corporation of Saskatchewan
). Morningstar gives it a five-star rating and I can see why. The ETF's three-year performance as of February 17 was 26.8% on an annual basis compared to 22.5% for the S&P 500. Year-to-date it's up 12.6%, 400 basis points
higher than the index. If you like Kubota and you think agricultural prices will continue to rise, this is the ETF to own. (For related reading, see 5 ETF Flaws You Shouldn't Overlook.
ETF # 2
For those who specifically like Kubota and not necessarily agribusiness, there are two ways you can go on this. As I mentioned earlier, Kubota is looking to generate most of its revenue outside Asia. Therefore, a non-Asia-centric fund could be what's called for here. An interesting idea is the RevenueShares ADR Fund
), which replicates the performance of the S&P ADR Index, itself representing the non-U.S. companies in the S&P Global 1200. The downside to owning this fund is that the Kubota position is a minuscule 0.17% and the net expense ratio is 0.49%, making this an expensive way to own Kubota.
The second way to own Kubota is to buy the iShares S&P/TOPIX 150 Index Fund
), which replicates the performance of the Japanese equity market. The Kubota holding is 0.61%. While small, it's still higher than the RevenueShares fund. Unfortunately, it also is expensive at 0.50% annually. Not to mention you're betting heavily on the Japanese economy and that wasn't the goal here. I'd probably pass on this last idea.
At current prices, while Kubota's stock isn't cheap, long-term I think you'll do just fine. However, if you can't or won't take the risk, the Market Vectors Agribusiness ETF makes a whole lot of sense.
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