Kubota (OTCPK:KUBTY, OTCPK:KUBTF) is a Japanese-based manufacturer of heavy equipment and water products. The company has been manufacturing tractors for rice farmers for decades and continues to grow. Kubota is growing the size of its tractors and will one day produce the large tractors used in row crop farming and construction.
The stock trades for ¥1,498, there are 1.23 billion shares, and the market cap is ¥1.842 trillion. Earnings per share are ¥120.06 and the price to earnings ratio is 14.7. The dividend is ¥34 and the dividend yield is 2.27%. Not badly priced upon those metrics.
From Kubota’s website.
The last time that I wrote about Kubota in 2015, sales were ¥1.688 trillion. Since then, sales have grown to ¥1.85 trillion. Nice topline growth. However, earnings have dropped from ¥149 billion to ¥139 billion. Free cash flow has been around ¥150 billion over the last few years but dropped to ¥38 billion last year. Capex is usually around ¥50 billion. You can see that management likes to keep capex at a constant level.
The balance sheet is bullet proof. Cash is ¥293 billion and receivables ¥965 billion. Payables are ¥322 billion and debt ¥875 billion. Strong balance sheets are typical of most Japanese companies.
What reminded me of Kubota is an excellent article in The Financial Times. Kubota is the number one ag producer of rice equipment in the world and has been at it a long time. The company is focusing on international sales and receives 68.8% of sales outside of Japan. It is building a factory in India that should produce 50,000 tractors by 2021. Africa is a big focus as the continent has much room to improve its rice yields. In the Investor Presentation above, Sub-Saharan Africa produced 1.4 billion tons of rice in 2008 and doubled the amount in 2018. Production is estimated to be 5.6 billion in 2030. If this happens, it portends good things for Kubota.
As an example, Tanzania uses 1/100th the level of tractors per 100 square kilometers as Japan. That means rice production is still being done by hand. 70% of Tanzania’s workforce is in agriculture.
From Kubota’s website.
As noted about, more than 15% of sales come from water products. This includes: metal and plastic pipes, pumps, membranes, and other products. Kubota produces a lot more machinery than just agriculture. It also manufactures lawnmowers, all-terrain vehicles, excavators, engines, and loaders. Much of its equipment is geared towards the smaller market.
Morningstar has a fair value on the stock of ¥1,730. Morningstar thinks that Kubota should do well with rising global demand for food. The research report also notes that Kubota has done a good job with self-autonomous vehicles. The average return on invested capital has been over 13% over the past nine years. Morgan Stanley likes the stock too and has a target price of ¥1,700.
Here’s my opinion of Kubota. It reminds me of Toyota (NYSE:TM). Twenty five years ago, Toyota made small vehicles, especially trucks. Then they introduced a slightly larger truck, the T100. Then, the Tacoma. Eventually, these trucks had V8 engines, comparable to U.S. pickup trucks. Now, Tacomas come with four doors and huge V8 engines.
I think Kubota will go through the same growth pattern. Right now, it makes smaller excavators and tractors. Actually, I wouldn’t call its tractors small as some have 210 horsepower. 210 horses are large enough to plow a field and pull a 16 row planter. But still, what I call the “Big Three”, John Deere (DE), Agco (AG), and Case (CNHI) have tractors with over 600 horses that can be used in construction.
Because Kubota has had smaller tractors, it hasn’t been affected to the same degree as the Big Three. Corn, soybeans, and wheat are usually farmed with larger horsepower tractors. Kubota has been focusing on rice which hasn’t been affected to the same degree with issues with China.
I advise you to follow Kubota. It’s in growth mode. The company’s thesis is correct: the world is growing and billions of people eat rice as a staple in their diet. Kubota is positioned to profit.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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