Kubota: Initiating Coverage of Wide-Moat Compact Farming/Construction Machinery Manufacturer

We initiate Kubota 6326 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’s wide moat comes from our confidence in its ability to fend off competition and maintain a return on invested capital above its weighted average cost of capital over two decades. Its intangible assets moat source, supported by its dealer network and brand/reputation, has taken decades to develop. The firm pioneered the market for diesel-powered compact tractors in the U.S. by targeting homeowners with landscaping needs, after establishing its first overseas tractor sales base in the region in 1972. Since then, their applications extended to small-lot farms, vineyards, orchards, and other areas with narrow spaces. With farming equipment, the firm has the top share with subcompact tractors under 40 horsepower in North America, Asean regions, and Japan, as well as crawler-type rice combine harvesters in Japan/Asean. Further, on the construction side, the firm has the leading global share with mini-excavators, and second-highest share with compact track loaders in North America.