During the fourth quarter of 2012, Southeastern Management, a large mutual fund managed by billionaire Mason Hawkins, initiated a position of 1.5 million shares in CNH Global NV (NYSE:CNH), a $10 billion market cap manufacturer of farm and construction machinery (see more of Southeastern’s stock picks). The fund has continued buying stock in CNH Global NV (NYSE:CNH), with a recent 13G filing revealing that it now owns 3.7 million shares or a little over 12% of the total shares outstanding.
In the first quarter of 2013, CNH Global NV (NYSE:CNH) recorded a 21% increase in its earnings versus a year earlier. That’s certainly good news, but revenue was up only slightly over the same time frame. It’s unlikely that the company will be able to continue growing its net income slowly through improving its margins, and as a result we’d be skeptical about how sustainable this earnings growth will turn out to be unless the top line picks up as well.
We are able to see Southeastern’s holdings of CNH Global NV (NYSE:CNH) from the beginning of this year with our database of 13F filings from hundreds of notable investors, including hedge funds. We’ve also used our database to develop investment strategies; we have found, for example, that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year (learn more about our small cap strategy). Another major investor in CNH at the end of December was billionaire Mario Gabelli’s GAMCO Investors, which reported a position of 2.2 million shares (find GAMCO’s favorite stocks).
CNH’s peers include Caterpillar Inc. (NYSE:CAT), Joy Global Inc. (NYSE:JOY), Deere & Company (NYSE:DE), and AGCO Corporation (NYSE:AGCO). Trailing earnings multiples for this peer group are between 8 and 12, showing that CNH is not that out of the ordinary compared to similar companies and financial markets are expressing skepticism on each company. Caterpillar Inc. (NYSE:CAT) actually had a quite poor Q1, in which revenue was down 17% compared to a year ago and net income fell 45%. With the sell-side expecting a similar level of earnings growth there, CNH Global NV (NYSE:CNH) might be a better buy than its larger peer. Joy Global Inc. (NYSE:JOY)’s business has been about flat, and once again- despite what is an anticipated dip in earnings over the next year, we get a PEG ratio of just below 1. Deere and AGCO Corporation (NYSE:AGCO), which focus more on agricultural machinery as opposed to that for construction or industrial functions, each experienced moderate revenue growth in their most recent quarter compared to the same period in the previous fiscal year. Only Deere & Company (NYSE:DE), however, was able to convert that improvement to the bottom line as AGCO Corporation (NYSE:AGCO) saw a small decline in earnings. Read another take on how CNH measures up to some of these other companies.
CNH and its peers are certainly cheap, though as we’ve mentioned this is partly explained by the relationship between construction and macro factors. The company does look a bit cheaper than Caterpillar Inc. (NYSE:CAT), and with better recent results as well we’d be interested in learning more about the company. Deere & Company (NYSE:DE) might be an even more promising target for future research, however, given its more broadly based improvement in financials and its potential to be less affected by any poor economic news.
Disclosure: I own no shares of any stocks mentioned in this article.
