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IH Failure - tractor building business in general
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Posted by Steve - IN on November 01, 2003 at 11:03:58 from (12.222.30.13):
There's an interesting discussion below that started about one dealer's recollections, and turned into a talk about why IH failed, plus a comparison to Deere. I liked it, got me to thinking: Seems to me that these things make a bit more sense if you take a broader view of the whole situation - The number of farms has been in constant decline for the last 100 years or more here. With the same number of suppliers fighting over a smaller pie -- they're all going to get hurt somewhat; some will be hurt a lot more than others. Every outfit has some backbiting between engineering, manufacturing, marketing, finance, etc.; all finger pointing. It's the nature of company polictics. They all made some klinker tractors -- JD took #1 share in the mid 60's (I think) even after they'd made some klinkers with the 1010 and 2010. Read some of the comments on the JD board about those turkeys, and bear it mind that it might be difficult to blame IH's problems on one model or series; or one marketing department. The way the tractor makers planned for the certainty that they'd have fewer farm customers seems to be as important as anything else. IH chose to diversify into construction equipment, trucks, etc. Not a bad strategy. They located at 180 N. Michigan Avenue in Chicago (that part of the big city being about as mentally removed as possible from the farm market) and employed "hired gun managers" to spread their risk by trying to juggle a number of balls (different, non ag markets). Deere, which seemed to be the most conservative of the bunch, stuck to just the AG business and stayed where the family had always been, a fairly small town in Illinois (interesting to note that the guys running JD have seem to always be related to John Deere himself, albeit oftentimes by marriage.) Deere was generally the slowest to innovate, therefore all their new products seemed to copy whoever else, and they were probably the last of the US makers to build/acquire production offshore. The "family" at Deere never wanted to sell out (in much the same way as the Ford family still controls Ford). They stuck close to their knitting in the AG business, and generally didn't need gurus from Manhatten. The "hired guns" at IH and the other, more diversified, outfits needed financing to diversify, so they had to play by the "golden rule" meaning the guys on Wall Street with the gold make the rules. Easy to see why one outfit could get pushed too hard, too fast and eventually make a mistake and be dismembered of one or more of the balls they were juggling -- or maybe have the whole outfit sold down the river. Fast forward to yesterday. Deere stock (ticker DE) trades at an all time high of $60.75, up 60 per cent from March of this year. This is a company that has underperformed the SP500 for nearly all of the last 10 years. How come? Looks like JD has shown Wall Street that most of their earnings come from outside the USA and outside the AG business. Will this now "International" company "Harvest" the same problems as IH? Time will tell -- but maybe the smart money will let JD run a few more bucks, then book it as a good, solid short for the next nine months. Also yesterday I found the following info on some other remaining tractor suppliers: 1. "Italian FIAT owned CNH (Case IH + New Holand) has lost money for the past three years as it focused on integrating product lines from the merger of Case Corp. and New Holland NV. It said it still expects to report a profit before restructuring charges in 2003 the stock is rated underperform." 2. "Agco (ticker AG, known to us as Allis Chalmers tractors). AG is one of the world's largest farming equipment manufacturers, with operations in the U.S., South America and Europe. AG has already benefited from emerging reflation, with Q3 worldwide revenues up 16% to $800 million and Q3 earnings up 69% to 22 cents per share. Despite this uptick, shares of AG remain -33% below their 52-week high that was reached late in 2002." Seems to me the worm has turned 180 degrees. The once pure ag play, Deere, is a diversified construction equipment supplier closer to CAT, and enjoys a stock multiple like CAT. While Case/IH, New Holland plus Agco are now seen as "pure play" all agricultural suppliers - with weak stock prices to prove it. Or, to use the phrase that is said to always be right for all occassions: "this too shall pass".
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