Thursday’s Daily Alert featured a small-cap play on agriculture with real estate company-slash-lemon and avocado grower Limoneira (LMNR). Today’s recommendation is another play on growing food demand, but through a very different company. Here’s the recommendation, from Global Investment Strategist.
“To meet growing global food demand, agriculture is embracing innovation. ... When it comes to agricultural equipment, the best play is Japan-based Kubota (KUB). The company manufactures and sells all manner of farm equipment including irrigation systems, tractors, combine harvesters and tillers.
“While North American powerhouse Caterpillar (CAT) has sold off sharply after warning that its 2012 profits and growth would be adversely impacted by global economic weakness, Kubota has hung tough and is performing in line with expectations, largely thanks to its regional sales profile. While almost half of all its revenue is generated within Japan, less than 9% of its sales are typically made in Europe, a major market for Caterpillar.
“The company’s sales have also remained strong in North America, where its products generally enjoy a price advantage over its competitors. It has a production facility scheduled to open in January, bringing its US facility count to three. Kubota is also making inroads into the Chinese agricultural equipment market and is seeing growing sales of its light construction equipment in the country. The Chinese market has performed so well for Kubota that it opened a production facility in the country this past August.
“An extremely efficient operator, Kubota has managed to grow earnings by an average 9% annually over the past three years even as revenue has contracted marginally. It also maintains a healthy balance sheet with a debt-to-equity ratio of just 0.3. It also holds a cash balance of close to JPY 100 billion on its balance sheet.
“Given the company’s cost advantages and broad manufacturing footprint (it has facilities in the U.S., Europe, Saudi Arabia and throughout Asia) it is well positioned to push into a number of emerging markets. While it doesn’t break out emerging market sales in its reports, Kubota’s executives have said the company is experiencing incremental but accelerating sales growth in both Africa and South America. Buy Kubota up to 56.”
- Benjamin Shepherd, Global Investment Strategist, October 31, 2012