Buhler Industries (BUI:TSE)Established in 1932 as an agricultural equipment manufacturer, Standard Gas Engine Works was purchased by John Buhler in 1969. Through steady expansion, new products and acquisitions, the company has experienced steady growth and has evolved into one brand name: Buhler.Over the years, many brands have joined the Buhler family: Farm King, Allied, Inland and Versatile. Today Buhler operates several modern manufacturing plants and distribution centers. Factories in Morden and Winnipeg ,Manitoba,Canada , and Fargo, ND, build tractors, front-end loaders, augers, compact implements and more. Buhler maintains several well-stocked parts warehouses.Buhler is continuously improving it’s products and preserving it’s reputable, respected brand.On October 30th,2007 , 80% of their outstanding shares were acquired by the Russian firm Novoe Sodruzhestvo( the shares were actually bought through there fully owned subsidiary Combine Factory Rotselmash ltd.).Novoe has an excellent track record in Russia for turning around companies who have been declining in profitability and declining growth in their primary markets. The firm now has complete control of Buhler’s operations .We feel Buhler Industries Inc. will be a good partner to our Russian companies. Officially, the companies will work independently of each other but, it goes without saying, that we shall use the potential of every company for the greatest effectiveness. “Rostselmash” company has a developed network of service centers – more than 160 official representations in Russia, Eastern Europe and Central Asia. This will stimulate quick promotion of Canadian tractors to the new markets. In turn, we hope that farmers in North America will quickly learn about the Russian combines from our Buhler dealers.Konstantin Babkin, President, of Novoe SodruzhestvoNovoe plans to expand Buhler into new markets where their subsidiary Rotselmash is most present most notably Ukraine and Russia and with this year’s guidance for production to increase from 600 to 1,100 tractors at the Winnipeg plant one can see they have high ambitions for the growth prospects of this company.On October 30th Buhler held it’s first ever North American Dealer meeting and announced some major news. All tractors would now hold the name Versatile and debuted a new line: the Versatile 250 / Versatile 280 front-wheel assist tractors, the tractors were very well taken by farmers.Although the new product lines will help drive steady growth I believe the major growth driver for this company will be the expansion of existing tractor lines into high growth countries. This will be done by distributing its tractors through Rotselmash’s dealer network already in place through it’s parent company, Combine Rotselmash ltd. The best distribution network in Eastern Europe and spanning 17 countries. In it’s first year, new management doubled it’s volume of tractors to oversees markets. The advantage of integration into a high growth market with virtually no CapEx with the wide brand recognition of Rotselmash will likely grow Buhler’s overseas operations at a fast pace.In the first year after Novoe’s investment, Buhler managed to achieve extraordinary financial results growing earnings 218% from 0.27$ per share to 0.88$ per share.Fundamental OverviewEarnings per share declined significantly from it’s peak in 2002 at 0.58 per share to 2007 0.38 cents a share! A 45% decline! Profitability ratios were miserable, management was a mess as new management needed to restate numerous past financial statements.Moving to the most recent improvements by the new management, the company as noted above grew EPS 218%, ROC and ROE rose from 7% and 8% respectively to 28% and 22% respectively! Improving Gross Margin and EBITDA margins quite nicely as well from 17.1% and 8.1% to 20% and 16.3% respectively! Finally to show this was no gimmickry of accounting measures EBITDA grew 256% against EPS up 218%.Turning to Buhler Industries balance sheet, it has a nice current ratio of 2.18.LT debt/equity 0.004In addition, debt standing at 15 million was reduced to 513 thousand this year. This was in part helped by debt forgiveness by the Canadian Government in thanks for restating past statements and paying the appropriate taxes, or so I assume!Finally a look at the assets/liabilities ratio shows us Buhler is in great form:178 583 000/68 506 000 = 2.6 assets/liabilities ratioIn our last of look at Buhler’s financial statements is the cash flow statement we’re we won’t delve to far. A look at the FCF should do it for this statement.2008 2007Cash from Op 28 110 000 14 951 000- -Cap Ex 3 290 000 3 151 000Free Cash Flow (FCF) 24 820 000 8 801Growth (yoy) 242%Now let’s look at the FCF yield.FCF 24 820 000\Market Cap 127 750 000FCF yield 19.4%All these numbers are extremely impressive. Simply looking at these numbers one would assume a stock trading at a 20 P/E ratio with high volumes and a large cast of analysts. However, this is not the case.ValuationBuhler’s P/E ratio is 5.79. Quite low compared to the overall market. However, when compared to the Farm and Construction Machinery industry it is slightly lower than the average of 9.7 which may make it seem like Buhler is fairly undervalued. In addition, Buhler is growing at a much higher pace than it’s competitors. Buhler’s P/E/G is 0.0265 compared with 0.87 for the industry. Buhler Industries Farm and Construction MachineryP/E 9.7 5.79P/E/G 0.0265 0.87P/B 1.12 2.14P/FCF 5.14 26.5Profit Margins 10% 3.2ROE 22% 15.When compared to its counterparts in Emerging Markets, Buhler’s growth is impressive. However, the value aspect is slightly distorted. As in the Emerging Markets, there is large political risk as well as currency risk. This plays a big part in the market’s valuation of these companies.Market Cap 127 750 000-Cash, Investments 14 510 000Acc. Re. 49 320 000+debt, leases 760 000Enterprise Value(EV) 64 680 000EV 64 680 000/EBITDA 35 593 000EV/EBITDA 1.817RisksCompetitors- There is quite a bit of competition in the tractor industry in North America coming from numerous competitors. Although Buhler is competing well, their strength might slip with the introduction of a new product by a competitor. There is less competition in Eastern Europe where Buhler will benefit from an established distribution network.Commodities- A concern Buhler pointed out in their Annual Report is their exposure to the variations in other commodities such as corn, wheat etc. Any significant change in commodity prices would impact Buhler’s earnings. Although recent performance has somewhat discounted this risk.Insider selling- Founder John Buhler, who sold much of his stake and voted in favor of the sale of 80% of outstanding shares to Novoe, is selling part of his remaining 15% of the company on the open market. He is selling in small increments but Buhler stock doesn’t have large volumes trading. So this may be a concern over the short to mid term.Why do we like Buhler Industries:1) Made it to the Big Leagues: With Combine Factory Rotselmash ltd. responsible for 1/5 of the world’s combines now it’s largest share holder and responsible for operations, good things seem destined for Buhler. Novoe Sodruzhestvo acquired Rotselmash back in 1999 when the company was burdened in debt, produced 850 combines a year and was burning cash quick. The next year they turned profitable and 8 years later (fiscal 2007) they now produce 5200 combines a year and have 65% of the Russian market.2) Making money in a recession? : Buhler has virtually been immune to the global recession and has even prospered, the commodity run up did help Buhler although q1 2009 results are more impressive in terms of growth than q1 2007 to q1 2008. Even the credit squeeze has apparently not hurt Buhler, large purchases need debt and nobody can get loans these days and your talking about emerging market banks! Well yes, actually they may be better off, according to Morningstar 93% of banks loaning to the farming sector are under 10B in asset size and only 18% are publicly traded. So in other words they were not involved in much of the sub-prime mortgage loans. Buhler also hired 100 people for positions in it’s North American Factories, at the same time rival CNH is cutting 140 jobs among many other competitors that are also.3) Buhler? What do they do? : Buhler is under the radar of everybody on Bay street and does not have any institutional owners. No analysts cover the stock , and it is also going unnoticed by the public. At some point Buhler will come up on somebody’s screen and will light gasoline to start the fire and this stock will rocket up!4) Where’s the food?: Buhler is most certainly a play on agriculture and as our population keeps growing the demand for food will keep growing. However, somewhat coming back to the previous point most people play on this investment theme through a fertilizer company like Potash Corp of Saskatchewan.5) Subsidiaries: Old management chose to use it’s cash to acquire many of it’s suppliers rather then move into new geographical regions with it’s product lines. So it owns its steel supplier, rubber ,screws and nuts. In it’s first year however, new management sold off many of these subsidiaries. It does still hold on to some to reduce costs and be hedged for any market.6) Valuation: An investor can be confident purchasing Buhler at a 1.8 EV/EBITDA multiple, 5x FCF and at it’s lowest P/E in 10 years in the most prosperous period of growth in it’s 40 year history.Catalyst:-growing demand for agricultural products- valuation-growth into overseas marke
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