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Tuesday, November 3, 1998
Case Corp.
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Phone: (414) 636-6011
Website: http://www.casecorp.com
Price (11/2/98): $23
HOW DID IT FIND TROUBLE?
Looking for victims of international financial turmoil? Look no further than agricultural and construction equipment maker Case Corp. The company's second-quarter earnings took a wallop after a Russian order for 500 combines had to be delayed. The economic situation has also significantly slowed sales into Asia, with revenues from the region dropping 28% year-to-date.
Asia represents a relatively small portion of the company's total sales, but is an important part of the agricultural community's market. Weakness in grain sales to Asia means farmers have less money to spend on big-ticket items, such as Case tractors. The Department of Agriculture expects farm income to drop 12% in 1998 compared to 1997.
In the last couple months, Case has been actively watering down expectations for the future. With phrases such as "worsening global outlook" and "unfavorable exchange rates," as well as "sales declines in higher-margin equipment" peppered throughout the company's press releases, it's little wonder investors are slightly worried about the company's fundamental health.
Looking at the past performance of Case in recessionary periods may also be weighing on the thoughts of investors. After seeing losses at the company throughout much of the early 1990s, including a $614 million operating loss in 1991, investors with negative outlooks for the economy are fleeing Case in droves.
Combine all the above factors and Wall Street has buried the stock alive.
BUSINESS DESCRIPTION
Founded in 1842, Case Corp. is based in Racine, Wisconsin, and is the world's largest maker of small-to-medium-sized construction equipment, such as bulldozers and excavators. The company is also a major player in the farm equipment business, selling under both the Case and International Harvester brands. Products in this division include tractors and tills.
Furthermore, the company is active in selling replacement parts for its equipment, and has a financing arm used to facilitate sales of its broad product array.
Case has a large presence abroad -- nearly half of the company's sales initiate from foreign soil. The company also is a member of the S&P 500 index.
FINANCIAL FACTS
Income Statement
12-month sales: $6,180 million
12-month income: $381 million
12-month EPS: $4.87
Profit Margin: 6.2%
Market Cap: $1,712.2 million
Balance Sheet
Cash: $108 million
Current Assets: $6,017 million
Current Liabilities: $3,535 million
Long-tern Debt: $2,020 million
Ratios
Price-to-earnings: 4.7
Price-to-sales: 0.28
HOW COULD YOU HAVE SEEN IT COMING?
It has been over a year since the meltdown in Asia's economy first started making headlines, yet Case's stock held relatively strong through April. Adept investors who made the connection between the situation abroad and Case had plenty of time to bail out before the stock started its plunge. Although it may look obvious now, investors in economically sensitive companies should be careful not to discount negative economic news too heavily.
Case also represents an excellent case study of the dangers of investing in capital-intensive businesses. The relatively thin profit margins and high annual capital expenditures leave little room for error. Even if the financial results have yet to be severely impacted, Wall Street cares more about the future than the past and is clearly quite worried. While the numbers may have looked healthy earlier this year, the outlook for the future is what was truly driving the stock southward.
WHERE TO FROM HERE?
The near-term prospects for the company look stormy at the moment, and the company is taking steps to insure its own financial safety through the turbulence. In the company president's own words, "Given this market outlook, and in anticipation of continued economic deterioration, we are proactively managing our business, matching production to retail demand. As a result, we are further decreasing production in 1998 to keep product inventories in line with our current four-to-five months of supply. In addition, we are accelerating cost reduction initiatives and lowering growth-related expenditures to maximize earnings in this environment."
Like all heavy-equipment businesses, Case's business is extremely capital-intensive. While facing a questionable economic outlook is never good for such companies, Case's cost of capital has, along with the rest of the market, generally decreased due to the strength in the bond market combined with the Federal Reserve's recent interest rate cuts. Not only does the company have to pay less for its loans, so do Case's customers. Lowering the financing costs to construction companies and farmers may generate a few sales that may not have happened in a higher rate environment. In other words, lower interest rates represent a mitigating factor to the present economic uncertainty.
The company's brutal honesty about its forecasted earnings is admirable. Little spin-doctoring here, just a frank assessment of the company's health in its press releases. But, to ultimately know where Case is headed one must know where the economy, both internationally and domestically, is headed. Cost-cutting measures at the company have put it in a better position than the last cyclical downturn, but a vibrant economy should be the primary concern for investors in Case.
Should the international situation normalize a tad, value investors may do themselves a favor to look further at Case at these rather inexpensive levels. Likewise, the "E" in Case's P/E ratio is in danger of quickly vanishing should the recessionary pressures continue to spread. And if the "E" goes down (as in both economy and earnings), the "P" is probably going to stay deflated, too.
-- Paul Larson
([email protected])
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