Wednesday, October 23, 2013

Why I chose CMI ?



About Cummins-

Cummins is an engine manufacturer and was founded in 1919. Cummins has four segments: Engine, Power Generation, Components and Distribution. The Company designs, manufactures, distributes and services diesel and natural gas engines, electric power generation systems and engine-related component products, including filtration, exhaust after treatment, fuel systems, fuel systems, controls systems, air handling systems and electric power. The Company sells its products to original equipment manufacturers (OEMs), distributors and other customers worldwide. It serves its customers through a network of more than 600 company owned and independent distributor locations and more than 6,500 dealer locations in more than 160 countries and territories.  

Historical data – 

Year
Rev/share
Earnings/share
Div/share
Earnings growth
2013
$95.50
$8.10
$2.25
-6.79%
2012
$91.33
$8.69
$1.80
-4.19%
2011
$93.56
$9.07
$1.33
75.44%
2010
$66.87
$5.17
$0.88
109.31%
2009
$53.64
$2.47
$0.70
-39.46%
2008
$71.23
$4.08
$0.60
10.27%
2007
$65.53
$3.70
$0.43
8.50%
2006
$54.52
$3.41
$0.33
24.00%
2005
$53.37
$2.75
$0.30
48.65%
2004
$48.16
$1.85
$0.30
444.12%
2003
$38.96
$0.34
$0.30
-40.35%
2002
$37.91
$0.57
$0.30


Growth Opportunities – 

Similar to my previous article on AGCO, best thing I like about CMI is the diversification it provides – it operates in 160 countries. This geographic diversity and broad product and service offerings help limit the impact from a drop in demand in any one industry or customer or the economy of any single country. Cummings brings 45% from North America and remaining 55% from foreign sales. As part of their growth strategy, Cummins invest in businesses in countries such as China, Brazil, India, Mexico, Russia and countries in the Middle East and Africa. The first thing any emerging /frontier countries will build is infrastructure and to build infrastructure companies need trucks/heavy machinery. Cummins captures that growth by provides engines for trucks. Countries across the world are tightening emission/carbon controls and customers will be forced to upgrade to eco-friendly vehicles.  

My bottom line –

I think Cummins operates in a very good market segment. It’s very hard for new companies to develop and get the penetration Cummins has. You pretty much get the growth of the entire industry around the world with one company. Some of Cummins customers are PACCAR, Navistar, Daimler Trucks North America, Ford Motor Company, International Truck, MAN Latin America, Volvo, Komatsu, Hyundai, Hitachi, Chrysler(RAM), JLG etc. So I’m not debating which automaker to buy, I’m just buying CMI to get exposure to the entire sector.
I bought CMI at $92.x in June 2012. CMI is fairly valued at PE 18.x (forward PE is 13.x) in line with S&P at 18.x. Earnings are expected to grow in FY14.

It carries little amount of debt of $754million. It has just cash of $1.5Billion. It has a current ratio of 2.1 (more than 1.5 is very good) and quick ratio of 1.3, so I’m not at all worried about debt.  
It pays a fairly good dividend for yield seekers. It pays 62.5 cents quarterly which translates to 1.8x based on today’s closing price. The payout ratio is only 25%. It has lot of room for dividend increases. 

I believe Cummins is rightly positioned to take advantage of world growth and I’m staying long CMI.

Monday, October 14, 2013

Why I chose AGCO ?



About AGCO-

AGCO is a global leader focused on the design, manufacture and distribution of agricultural machinery. AGCO supports more productive farming through a full line of tractors, combines, hay tools, sprayers, forage equipment, tillage, implements, grain storage and protein production systems, as well as related replacement parts.

Its products are sold through five core brands, Challenger, Fendt, GSI, Massey Ferguson and Valtra. These are distributed globally through 3,150 independent dealers and distributors in more than 140 countries worldwide. It has 20,300 employees worldwide. 

Historical data – 

Year
Rev/share
Earnings/share
Div/share
Earnings growth
2013
110.8
6.09
Q/0.1
16.22%
2012
102.9
5.24
-
17.23%
2011
90.26
4.47
-
95.20%
2010
74.04
2.29
-
59.03%
2009
71.72
1.44
-
-64.79%
2008
91.73
4.09
-
60.39%
2007
74.53
2.55
-
131.82%
2006
59.61
1.1
-
-24.14%
2005
60.21
1.45
-
-15.70%
2004
58.34
1.72
-
75.51%
2003
46.35
0.98
-
139.02%
2002
38.87
0.41
-

Growth Opportunities – 

Best thing I like about AGCO is the diversification it provides – in 2012 only 26% of revenues are from North America; 52% came from Europe, Middle East & Africa; 19% came from South America; 3% came from Asia pacific.You are getting world growth in agriculture industry with this company.

To diversity its product line, it has made number of acquisitions over the past few years and is aggressively expanding in Africa and South America. I believe it is the place to be for this business in the next decade. It can grow easily at 10-15% annually for the next few years.


My bottom line –

I bought AGCO at $51.x in March 2012. It went all the way down to $38 in May 2012 and I wish I added to my position. I got too greedy and had a limit buy order waiting at $35.xx to double down on my position but it bounced back from $38.

Agricultural machinery business in general is volatile compared to other sectors due to various factors – weather/drought conditions, crop prices, seasons, harvesting/planting etc. and you can see that in historical data. But I believe AGCO is undervalued at PE 11.x (forward PE is 10.x) while S&P trades at 17.x. It has a PEG ratio of 0.8x based on next 5 yrs expected earnings. 

It carries a manageable amount of debt and has a current ratio of 1.72 (more than 1.5 is very good), so I’m not worried about debt.  AGCO’s competitor DE has current ratio of 2.2x which is better than AGCO’s ratio. But I believe 1.72 is a very good ratio. In  comparison, CAT has a current ratio of 1.3x, KO has a current ratio of 1.0x, IBM has 1.2x and these companies need no introduction. 

It started paying out dividend of 40 cents annually which translates to 0.65%. It’s not a great yield for dividend yield seekers but it is paying out less than 8% of its earnings. It has lot of room to increase its dividends and I believe it will in the upcoming years.

So I believe AGCO is reasonably valued. I’m long AGCO.