Company Reports

We leave our fair value estimate for Kubota unchanged at JPY 2,700. Despite the better-than-expected 2023 results, we continue to project 2024 revenue to be JPY 2.9 billion, implying a 2.6% year-on-year decline, which is largely in line with guidance and well above prepandemic levels. The mild revenue decline in 2024 is due to the macroeconomic headwinds, but we project a medium-term recovery of tractor sales from 2025. We believe the positive share price reaction suggests some of the concerns over a material top-line decline from the macroeconomic headwinds have eased. However, we believe its shares remain undervalued, as its medium-term prospects are underestimated by the market. We forecast a steady-state revenue CAGR of 4% between 2024 and 2028, driven by equipment upgrades and parts sales from maintenance, as farming/landscaping and residential construction activity pick up.

Kubota continues to strengthen its high-end compact farm and construction equipment offering for small agriculture and residential/lawn-mowing in its core markets. In its largest market by sales, North America, the company has established itself as the market leader and pioneer with subcompact tractors (under 40 horsepower) since forming its first overseas tractor distribution company in 1972. In Asia, the company utilizes its strength with rice farming machinery and has the leading tractor and crawler combine harvester shares in Japan and ASEAN regions. Further, on the construction side, the company has held the leading global share in mini-excavators for about two decades and has the second-highest share in compact track loaders in North America. We expect the company to utilize its developmental capability with small-size machinery, brand, and vast dealer network to capitalize on further demand.

Despite Kubota's stronger-than-expected September-quarter revenue growth of 6% year on year, supported by the weak yen, our outlook is largely unchanged. We continue to expect the company's revenue to be affected by dealer inventory adjustments and weaker retail sales of tractors and construction machinery in the following quarters. Our revenue projection from fiscal 2024 is unchanged, as we assume revenue to remain flat (after growing 10% in 2023), assuming a top-line recovery from the second half of 2024. We maintain our revenue forecast of a 3.5% compound annual growth rate between 2023 and 2027 and leave our fair value estimate intact at JPY 2,700 per share. We believe the shares are undervalued as the market is overlooking Kubota's medium-term prospects, driven by further farming activity and infrastructure spending as well as higher spare-parts sales, supported by the influx of new machinery users during the pandemic.

Kubota continues to strengthen its high-end compact farm and construction equipment offering for small agriculture and residential/lawn-mowing in its core markets. In its largest market by sales, North America, the company has established itself as the market leader and pioneer with subcompact tractors (under 40 horsepower) since forming its first overseas tractor distribution company in 1972. In Asia, the company utilizes its strength with rice farming machinery and has the leading tractor and crawler combine harvester shares in Japan and ASEAN regions. Further, on the construction side, the company has held the leading global share in mini-excavators for about two decades and has the second-highest share in compact track loaders in North America. We expect the company to utilize its developmental capability with small-size machinery, brand, and vast dealer network to capitalize on further demand.

We initiate Kubota with a wide economic moat rating, supported by its vast dealer network and brand/reputation. Our fair value estimate of JPY 2,700 is based on the expectation of a near-term slowdown in demand for small-size tractors followed by a recovery from the second half of 2024, once dealers finish digesting their accumulated inventory. We believe most of the near-term downside risks are priced into the share price and see upside potential, as the market is underestimating the firm’s medium-term prospects. With its expertise in compact tractors/construction machinery as well as rice farming equipment, Kubota is strongly positioned to grow along with global farming activity/infrastructure spending, landscaping/lawncare demand in the U.S., and agricultural mechanization in Asia. Further, we expect the influx of new users from the pandemic boom will translate to future sales from equipment replacement/upgrades, additional tractor attachments called implements and spare parts.

Kubota continues to strengthen its high-end compact farm and construction equipment offering for small agriculture and residential/lawn-mowing in its core markets. In its largest market by sales, North America, the company has established itself as the market leader and pioneer with subcompact tractors (under 40 horsepower), since forming its first overseas tractor distribution company in 1972. In Asia, the company utilizes its strength with rice farming machinery and has the leading tractor and crawler combine harvester shares in Japan and Asean regions. Further, on the construction side, the company has held the leading global share with mini-excavators for about two decades, and has the second-highest share with compact track loaders in North America. We expect the company to utilize its developmental capability with small-size machinery, brand, and vast dealer network to capitalize on further demand.

We are placing Kubota under review following a change in analyst coverage. We plan to reinitiate coverage of Kubota at end-September.

Kubota is one of the largest agricultural machinery manufacturers in the world; it focuses on tractors and rice farming equipment. While competitors such as John Deere and CNH focus more on large farm machinery, Kubota has been emphasizing machinery below 100 horsepower, a strategy that has turned out to be successful. Through the years, it has managed to build a strong brand name and achieve significant (if not leading) market shares in North America and Asia for its compact tractors, combine harvesters, and rice transplanting machinery.

After rolling forward our model and factoring in the better than-expected 2021 guidance, we raise our fair value estimate for Kubota to JPY 2,280 from JPY 1,830. Our narrow moat and stable moat trend ratings remain intact. We think the shares are fairly valued at the current price as the long-term earnings growth of the company driven by growing demand has been priced in. Kubota’s full year 2020 EBIT was slightly above its guidance, decreasing by 13.1% year over year to JPY 175 billion (guidance of JPY 170 billion) from JPY 202 billion on the back of a 3.5% year-over-year decrease in revenue to JPY 1.85 trillion from JPY 1.92 trillion. The lower EBIT was attributable to negative impacts of COVID-19 across all divisions, in particular its farm and industrial machinery division, which saw EBIT declining by 11.5% year over year to JPY 179.6 billion from JPY 204.5 billion. For the fourth quarter of 2020, EBIT increased by 28.0% year over year to JPY 45.4 billion on the back of an 8.1% year-over-year increase in revenue to JPY 496 billion, mainly driven by stronger recovery in its farm and industrial machinery division. A dividend per share of JPY 19 has been declared, bringing the full year dividend per share to JPY 36, in line with guidance.

Kubota is one of the largest agricultural machinery manufacturers in the world; it focuses on tractors and rice farming equipment. While competitors such as John Deere and CNH focus more on large farm machinery, Kubota has been emphasizing machinery below 100 horsepower, a strategy that has turned out to be successful. Through the years, it has managed to build a strong brand name and achieve significant (if not leading) market shares in North America and Asia for its compact tractors, combine harvesters, and rice transplanting machinery.

After taking into account the better-than-expected third-quarter 2020 results largely attributable to higher sales in Asia, we raised our fair value estimate for Kubota to JPY 1,830 from JPY 1,660. Our narrow moat and stable moat trend ratings remain intact. We think the shares are fairly valued at the current price as the long-term earnings growth of the company driven by growing demand has been factored in. Kubota’s third-quarter 2020 EBIT came in above our expectations, decreasing by 12.7% year over year to JPY 48.2 billion from JPY 55.2 billion on the back of a 3.5% year-over-year decrease in revenue to JPY 472.6 billion from JPY 489.9 billion. The lower EBIT was mainly attributable to a decline in its farm and industrial machinery division, which saw EBIT declining by 13.2% year over year to JPY 48.8 billion from JPY 56.0 billion.

Kubota is one of the largest agricultural machinery manufacturers in the world; it focuses on tractors and rice farming equipment. While competitors such as John Deere and CNH focus more on large farm machinery, Kubota has been emphasizing machinery below 100 horsepower, a strategy that has turned out to be successful. Through the years, it has managed to build a strong brand name and achieve significant (if not leading) market shares in North America and Asia for its compact tractors, combine harvesters, and rice transplanting machinery.

Kubota is one of the largest agricultural machinery manufacturers in the world; it focuses on tractors and rice farming equipment. While competitors such as John Deere and CNH focus more on large farm machinery, Kubota has been emphasizing machinery below 100 horsepower, a strategy that has turned out to be successful. Through the years, it has managed to build a strong brand name and achieve significant (if not leading) market shares in North America and Asia for its compact tractors, combine harvesters, and rice transplanting machinery.

After taking into account the slightly-better-than-expected second quarter 2020 results, we raised our fair value estimate for Kubota to JPY 1,660 from JPY 1,600. Our narrow moat and stable moat trend ratings remain intact. We think the shares are fairly valued at the current price as the long-term earnings growth of the company driven by growing demand has been factored in. Kubota’s second-quarter 2020 EBIT came in slightly above our expectations, decreasing by 11.8% year over year to JPY 51.2 billion from JPY 58.1 billion on the back of a 9.3% year-over-year decrease in revenue to JPY 444.6 billion from JPY 490.1 billion. The lower EBIT was mainly attributable to a significant decline in its farm and industrial machinery division, which saw EBIT declining by 12.5% year over year to JPY 56.7 billion from JPY 64.8 billion. Dividend per share of JPY 17 has been proposed, unchanged from the same period last year.

After taking into account the weaker-than-expected first-quarter 2020 results and lowering our revenue growth and EBIT assumptions, particularly for 2020 and 2021, we cut Kubota’s fair value estimate to JPY 1,600 from JPY 1,780. Our narrow moat and stable moat trend ratings remain intact. We think the shares are fairly valued at the current price as the long-term earnings growth of the company driven by growing demand has been factored in. Kubota’s first-quarter 2020 EBIT came in below expectations, decreasing by 42.4% year over year to JPY 30.5 billion from JPY 52.9 billion on the back of an 8.6% year-over-year decrease in revenue to JPY 439.5 billion from JPY 480.7 billion. The lower EBIT was mainly attributable to a significant decline in its farm and industrial machinery division, which saw EBIT declining by 40.8% year over year to JPY 30.5 billion from JPY 51.5 billion.

Kubota is one of the largest agricultural machinery manufacturers in the world; it focuses on tractors and rice farming equipment. While competitors such as John Deere and CNH focus more on large farm machinery, Kubota has been emphasizing machinery below 100 horsepower, a strategy that has turned out to be successful. Through the years, it has managed to build a strong brand name and achieve significant (if not leading) market shares in North America and Asia for its compact tractors, combine harvesters, and rice transplanting machinery.

Kubota is one of the largest agricultural machinery manufacturers in the world; it focuses on tractors and rice farming equipment. While competitors such as John Deere and CNH focus more on large farm machinery, Kubota has been emphasizing machinery below 100 horsepower, a strategy that has turned out to be successful. Through the years, it has managed to build a strong brand name and achieve significant (if not leading) market shares in North America and Asia for its compact tractors, combine harvesters, and rice transplanting machinery.

Kubota is one of the largest agricultural machinery manufacturers in the world; it focuses on tractors and rice farming equipment. While competitors such as John Deere and CNH focus more on large farm machinery, Kubota has been emphasizing machinery below 100 horsepower, a strategy that has turned out to be successful. Through the years, it has managed to build a strong brand name and achieve significant (if not leading) market shares in North America and Asia for its compact tractors, combine harvesters, and rice transplanting machinery.

After rolling forward our model and factoring in the lower-than-expected 2020 guidance, we cut our fair value estimate modestly for Kubota to JPY 1,780 from JPY 1,810. Our narrow moat and stable moat trend ratings remain intact. We think the shares are fairly valued at the current price as the long-term earnings growth of the company driven by growing demand has been priced in. Kubota’s full year 2019 EBIT was in line with its guidance, increasing 6.5% year over year to JPY 202 billion from JPY 189 billion on the back of a 3.8% year over year increase in revenue to JPY 1.92 trillion from JPY 1.85 trillion. The higher EBIT was attributed to improvements across all divisions, in particular its water and environment division, which saw EBIT improving 35% year over year to JPY 26.7 billion from JPY 19.9 billion. For the fourth quarter of 2019, EBIT decreased by 13.2% year over year to JPY 35.5 billion on the back of a 5.5% year over year decrease in revenue to JPY 459 billion, mainly driven by weaker performance at its farm and industrial machinery division. A dividend per share of JPY 19 has been declared, bringing the full year dividend per share to JPY 36, in line with guidance.

Kubota’s third-quarter 2019 EBIT was slightly above our expectations, increasing 16.8% year over year to JPY 55 billion from JPY 47 billion on the back of a 6.9% year-over-year increase in revenue to JPY 490 billion from JPY 458 billion. After factoring in the better-than-expected performance in the domestic market and making minor adjustments to our model, we increased our fair value estimate for Kubota to JPY 1,810 from JPY 1,730. Our narrow moat and stable moat trend ratings are intact. We think the shares are fairly valued at the current price, as we think that the near-term earnings growth driven by growing demand has been priced in.