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Gehl Company
March 13, 1998
GEHL UPDATE: TRENDS REMAIN STRONG, FINE-TUNING ESTIMATES UPWARD
52 Week ----- EPS ----- --- P/E --- Shs
Price Range FY 1997 1998E 1999E 1998E 1999E Div Yield (Mils)
21.75 25-10 DEC New 1.95A 2.18 2.40 10.0 9.1 0.00 0.0 6.2
Old 2.15
Current Rating: 2 Cyclical S&P 500: 1,068.47
Quarter update:
We had the opportunity to discuss the current quarter with management and
we came away with the following observations:
* Sales trends continue to be strong in Gehl's core business units and
end markets. Even as output increases, backlogs continue to increase at
Gehl. These results are consistent with the strong construction markets
recently cited by both Omniquip (OMQP - 25 1/2) and Manitowoc (MTW - 37
11/16). In addition, the milk to feed ratio has also been favorable, a
sign of health in Gehl's agricultural end markets. Q1 is the seasonally
slowest quarter for Gehl making extrapolation to the rest of the year
difficult.
* Net other expenses will be lower than expected given some asset sales
that will take place in the quarter.
* The Mustang integration continues. One concern management has
expressed is that apparently the Mustang sales channel was overfilled prior
to closing, causing initial sales to be lackluster. Sales appear to be
improving as the quarter progresses.
* We continue to monitor the potential impact of both Caterpillar's and
John Deere's announcement of their intention to begin manufacturing skid
steer loaders but are encouraged by the approval of funding by congress for
continued highway construction projects.
Estimates raised:
Given the current strength in the quarter and the outlook for lower
expenses, we are raising our first quarter estimate from $0.36 to $0.39 and
our 1998 estimate by the same amount from $2.15 to $2.18. Although the
increase is minimal, it is nonetheless significant in that the first
quarter is now projected to be at least flat when compared to last year.
Originally, initial dilution from the Mustang acquisition caused us to
project down earnings for Q1.
Valuation:
Gehl has just completed its fifth year of uninterrupted sequential year-
over-year growth. Its three year CAGR in EPS is 33% (pretax income
adjusted for a normalized tax rate grew at a three year CAGR of 58%). We
acknowledge that Gehl is in a cyclical industry with the threat of
additional capacity coming on line. However, the current economic
environment is advantageous for both construction and agriculture with its
low interest rates and modestly growing GDP. We believe that Gehl deserves
at least a group average multiple, yielding a price target of $26 over the
next twelve months. We therefore maintain our Buy-2 rating.
** Baird makes a market in Gehl Company and Omiquip. Baird was a manager
or co-manager of an offering for Omniquip.
Jeff S. Germanotta |
