Thursday, January 24, 2008

CNH Global

When I bought CNH two days ago, I though I had a low risk entry upon a bounce off its 200 DMA. Well, if I were to use a catching falling knives analogy, I didn't just cut my hands, I got them nailed to the floor. Nonetheless, I just can't see how the selling is justified by the fundamentals.

Ostensibly, the bloodbath was precipitated by a disappointing '08 EPS guidance of $3.30-3.60, below consensus of $3.67. However, at it lower bound the guidance is still 40% above the '07 EPS of $2.36. We can see from the chart below that the P/E of CNH was around 20 in '05 when earnings were flat. Through its bull run, its P/E rarely dip below 20. Today's closing price of $6.00 gives it a trailing P/E of 19.5 and a forward P/E of 13.9 assuming '08 EPS of $3.30. On a historical basis and in view of the 40+% anticipated earnings growth, the stock is cheap.

Perhaps people were unnerved with its guidance of North American construction equipment sales being down 10% in '08; however, for '07 the company saw a reduction of 23% in the same category but still managed a gain of 23% in worldwide construction equipment sales. The farm equipment side is more than twice as large and growing much faster. In summary, I see this sell-off as an over-reaction at a difficult time in the overall market. I'm holding onto CNH since I'm confident of its growth prospects.