Saturday, November 11, 2006

GEHL Analysis

Gehl recently came under the radar because of the considerable amount of insider trading in its stock. Let us take a look at its stock to see if it is a buy at the current prices. First, overview of its business from its website.

Gehl has been producing agriculture implements for nearly 150 years. Today, it is the leading non-tractor manufacturer of agricultural equipment in North America, offering a broad line of implements for the farm equipment industry.
In 1986, Gehl aggressively moved into the light construction equipment market as it established a separate construction sales division. Gehl serves small contractors, sub-contractors and owner-operators with dirt, lifting and paving equipment.
While Gehl has has a presence in international markets for over 50 years, in 1991 it focused its efforts through one group; Gehl International. Gehl International was formed to tap growing worldwide opportunities.

Some of the other big competitors in this field are CAT and AG. It is safe to say that GEHL operates in a niche environment.

Let us dive into the balance sheets to understand GEHL better.

GEHL operates in a capital intensive and cyclical business. In the second half of 2005, GEHL did a secondary public offering of its stock where it raised approximately $46 million to pay out its debt. GEHL operates in two segments - construction and agricultaral equipment category respectively. The construction segment accounts for 71% of the companies business and agricultural segment accounts for the remaining 29% of its business. The construction equipment segment is more profitable accounting for 84% of the profits whereas the agricultural division accounts for the remaining 16% of the profits.

The business is very capital intensive. In 2005, the company spent 7.5 billion in capital expenditures and had about 4.9 billion in amortization. What this figure shows is that the industry is very capital intensive and continuous capital expenditure is needed to keep the competitive position. The huge capital expenditure undermines the free cash flow generation. Even much larger competitors such as Caterpillar see huge swings in their free cash flow from year after year because of these trends.

Despite the stock dilution, the book value in the company increased in 2005 by almost 25%. This seems to be a one time event as this year the growth in book value has been more normal this year and the best case estimate would probably be around 10% gain.

Let us look at some of the ratios in the balance sheet over longer periods of time. Morningstar provides some very useful data and we can analyze the data provided by Morningstar. Ten year analysis of the earning per share shows that GEHL grew at a 8% pace compared to much more impressive 10.6% rate for caterpillar. Caterpillar also provides a dividend to put the full return at around 13%. Clearly, caterpillar is a better business to own than GEHL.

The next thing to look at is the current discount/premium compared to its peers to see if GEHL is a buy. The key factor in favor of GEHL is its price/book ratio. Caterpillar has a P/B of 4 where as GEHL has a better ratio of 1.48. Caterpillar however has a better earning yield compared to GEHL. GEHL has negative free cash flow where as Caterpillar is cash flow positive.

The short term technical analysis shows that the 100 day moving average is below the 200 day moving average - meaning the downtrend in the stock is not over. The insider buying is a clear indication that the stock is undervalued as there has been more insider buying than selling of late. As noted, the company is profitable and is probably worth about $36 a share. The estimates for next year's earnings are good but there are a lot of wild cards about next year - especially the way the economy is going to go. If those earnings estimates are met, it would provide the stock with an impetus to move higher.


Anonymous said...

Extemely shallow analysis given that on April 3rd Gehl announced they announced total cessation of the manufacturing and distribution of agricultural implement product lines. No mention of the growth in the telescopic handler business and the relationship with Manitou. Nothing like doing a little DD before you put pen to paper.

Anonymous said...

Agree with previous comment. If you want a detailed analysis go to the Gehl message board at Yahoo. Exports for Gehl rose 25% last quarter. Debt coming down. Taking market share in the US.