CNH: AGRICULTURAL EQUIPMENT STOCKS LOOK TO BE A VALUE

The agricultural story is alive and well throughout the world as emerging markets have found a middle class. This new group of people as a group are expanding and they are located in nations that have the biggest populations in the world. Supply and demand dictates that the more you have of something the cheaper it is and vice verse. This doesnt just include things such as oil or corn, but also people. Their large work forces mean that their populations have to fight for jobs that will push them into a level of income that means they will be able to have things that Americans have everyday, such as meat or a cell phone. This cheap labor has moved many of the blue collar jobs to places like China, India and even Hungary. As many of these citizens move from agricultural areas to industrial, they no longer produce their own food and must purchase it, but they also have more money to so and so eat more, especially meat. During President Clinton's term, NAFTA legislation was imposed. At first I opposed the bill, but now it seems that this Democratic legislation has incurred Republican favor as it has expanded throughout the world. NAFTA was suppose to keep inflation down by sending work to Mexico and Canada that the United State's no longer wanted and provide for US needs that we either couldn't or didn't want to be involved with. These types of jobs were figured to be unimportant as they paid to little and it also increased our imports of materials and energy from Canada. It was also suppose to keep illegal Mexican immigrants in Mexico as they would have more jobs in their home land. As many jobs went to Mexican companies based on their promise of producing products for US companies for dimes on the dollar, inflation stayed low. Other countries got into the act, and started to compete for this work with Mexico. China is who everyone is concerned with, but their broad economic expansion has been based in their ability to provide products for a penny on the dollar. This situation has many problems, but there are also positives that are a good trade for years to come. The agricultural boom is my favorite. I have positions of POT, IPI, and MON in my brokerage account. They have been volitile as of late but have many implications that point to growth now and in the years to come. One part of this play seems forgotten as DE couldn't provide what the Street wanted in last quarter's earnings. These forgotten companies have been sold off and are a value at the prices they sell. My favorite within this industry is CNH, although they all seem good going forward. CNH has seen it's stock price cut in half over since their high on January 3rd. Although they have broad exposure to construction equipment they are seeing massive demand for their high priced agricultural equipment. CNH is coming off of their best quarter in company history. Consolidated revenues were up 26%. Net income increased 18%. Their equipment operations operating profit was up 21%. Diluted EPS was up 20%. They also confirmed their 2008 outlook of $3.30 to $3.60 per share. If we break down the numbers you will understand why the long term benefits for owning this company could be quite large. Quarter over quarter, tractor and combine sales were up 2% from 2007. Outside North America tractor sales were up 5%. Large tractor sales in North America were up 30%. Most importantly were combine sales, as they were up world wide 40%. Market share for world tractor sales increased and combine share increased in Latin America and Western Europe. Combine sales share increased while the total revenue in this division was up 55%. Combine sales to Latin America alone were up 84%. It seems that much of the sell, with respect to CNH has to do with the slow down in North America. Even with North American construction equipment sales down 24% in light equipment and 28% in heavy equipment CNH still saw a world increase of sales of 17% and 29% respectively. They have seen positive pricing improvements in all areas except North American light construction equipment. These improvements have moved CNH to invest $88 million in improving company price efficiencies. These investments should improve margins going forward. 2008 outlook seems quite good. Large tractors, although projecting sales to be down in North America, look to have growth in sales of up to 6% for this year. This growth will be driven by Latin America, where sales are estimated to increase from 20% to 26%. World wide combine sales are estimated to increase 20-25%. Light construction equipment is estimated to grow up to 5% and heavy construction 5%-10%. Looking at these earnings and equating them to the current stock price has the PE at 11.9 and forward PE at 7.05. Analyst estimates have next quarter's earnings up 37.1% and full year's earnings up 30.8%. Next year's earnings are approximated to be 20.6%. Over the last five years, this company has grown 32% per year, while analyst's have the company only growing 8% for the next five. Even if this growth number is correct the company is only selling for a five year PEG of 1.07. The reason I believe these forward estimates to be low has to do with the US economy. I do not believe that much will get done to benefit the US until the election is done. In 2009, I do believe that the economy will improve as the situation with energy infrastructure is addressed. I do think that plants based on natural gas and nuclear will be started and with that give the economy a boost. This should help sales of construction equipment through 2009-2013 approximately. As this is occuring farm and construction equipment sales should continue to grow. Look for CNH to hit the top end of earnings for 2008.