Buhler has two silver linings

Investor’s Digest
September 16, 2005

Raymond James
An excerpt from a recent report by 
Analyst Ben Cherniavsky

With the U.S. Midwest experiencing its worst drought in 17 years, we expect fourth-quarter 2005 tractor sales at Buhler Industries Inc. (BUI-TSX, $7.29, 888-524-1003, www.buhler.com) to be negatively affected.

The prolonged Illinois-centered dry spell is now in its fifth consecutive month and should affect corn and soybean yields the most.

In mid-August, Deere & Co. blamed the dry weather in several key markets for its disappointing third-quarter 2005 results. Specifically, Deere reported a net income of $387 million, or $1.58 per share - well below the consensus estimate of $1.90 a share.

Industry data from the Association of Equipment Manufacturers also reflects this weather-induced hardship in the Midwest. Total farm tractor sales in the U.S. were down 16 per cent year-over-year for July.

Notably, both row crop tractors (over 100 horsepower) and four-wheel drive tractors, the two categories in which Buhler competes exclusively, were not affected nearly as much - both categories posted flat year-over-year sales.

Having said this, Canadian July sales tumbled considerably worse than the U.S., with row crop tractors and 4WD tractors plummeting 12 per cent and 27 per cent year-over-year, respectively.

This indicates that, regardless of favorable events such as the reopening of the U.S. border to Canadian beef, Canada’s farm equipment market continues to linger for now.

Despite the challenging outlook for the Midwest, we see two silver linings in this story for Buhler.

On the bright side...

First, the expected decline in overall yields, brought on by the drought, has provided a sharp boost to commodity prices.

The latest USDA 2005/06 projected prices for corn, soybean and wheat have all strengthened considerably since May of this year (ranging from 11 to 15 per cent increases), although two of the three still remain lower than one year ago.

Second, the excessive dry weather in the Midwest has not been experienced nationwide. By contrast, the Northern Plains (including Nebraska, Minnesota, western Iowa and Montana) are thriving this year after riding out a five-year drought of their own.

These two factors, coupled with Buhler experiencing strong sales outside of North America, lead us to believe that most of the slumping sales in the Midwest will be mitigated by other more positive variables, albeit at the expense of some revenue slippage into the first half of next year.

Based on the aforementioned considerations, we have made some minor adjustments to our model.

We are now lowering our fiscal 2005 earnings estimate by three cents to $0.38 a share, while at the same time raising our fiscal 2006 earnings forecast by two cents to $0.52 a share.

None of this materially changes our outlook for Buhler’s long-term fundamentals, and we are therefore leaving our $7.50 target price unchanged.

Nonetheless, we still believe valuation will keep Buhler’s stock range bound over the next 12 months. Accordingly, we are maintaining our "market perform" rating.

We would consider any material dips in Buhler’s stock price that is related to the market’s anticipation or realization of weaker-than-expected fourth-quarter 2005 results, as favorable entry points for long-term investors.