David Einhorn, founder of Greenlight Capital, prefers to earn gains while waiting for the market to recover, a strategy that applies to all investors. He recently said at the Delivering Alpha conference in November that he had just completed a position in agricultural equipment maker CNH Industrial.
“This is an opportunity that almost no one is paying attention to right now because the stock is cheap and there is probably no good news in the short term,” said the hedge fund manager, who rose to fame by shorting Lehman Brothers during the 2008-2009 financial crisis.
Dilemma in the agricultural market
Farms have certainly had a harder time lately. Wall Street expects CNH to earn $1 per share in 2025, down from $1.70 in 2023 and $1.12 in 2024, according to FactSet data. The trend is largely attributed to falling agricultural prices. In 2022, U.S. farm net income hit a record $182 billion, with the benchmark price of corn approaching $6 per bushel. By 2024, that price has fallen to an average of $4 per bushel, and the U.S. Department of Agriculture expects net income to fall to about $140 billion. Lower crop prices mean farmers spend less on tractors and combines.
Long-term bullish on CNH rebound
However, agriculture is a cyclical industry and prices will eventually rebound. Einhorn said that in the next upcycle, CNH could achieve $2 in earnings per share and double its stock price. During this period, he can also get a 4.1% dividend yield and the company's massive stock buybacks. In the first nine months of 2024, CNH paid $600 million in dividends and repurchased about $689 million of shares, reducing the number of outstanding shares by about 6%.
In addition, CNH is currently undervalued. Einhorn said, "Based on 2024 earnings per share, the price-to-earnings ratio is about 10 times, while the market average price-to-earnings ratio is about 23 times, which is very attractive to me." Even in the face of cyclical downturns, CNH's dividends remain stable. In the past 12 months, dividends accounted for about 80% of free cash flow, and Wall Street expects free cash flow to improve in 2025.
Other Dividend Stocks Worth Watching
Einhorn's logic also applies to other cyclical stocks, such as Ford Motor, Whirlpool and LyondellBasell. These three stocks are currently undervalued, with Ford, Whirlpool and Lyondell Basell trading at price-to-earnings ratios of 6.1, 9.6 and 9.4, respectively.
Ford Motor: New car prices fell as dealers' inventory backlogs.
Whirlpool: Home appliance sales depend on second-hand housing sales, and current second-hand housing sales have hit a new low since the financial crisis.
LyondellBasell: Management cited weak demand across most businesses in its third-quarter earnings report.
Still, Wall Street expects earnings to grow for all three companies by 2025 or 2026. During that time, Ford's dividend yields 5.6%, Whirlpool's 6.4%, and Lyondell's 6.5%. Those dividends are also relatively safe, with Ford and Lyondell each expected to pay out 70% of free cash flow in 2025, compared with 60% for Whirlpool.
It's important to note that Whirlpool's debt is relatively high, which could be a risk point for investors when considering the appliance maker.
If all goes well, investors will enjoy the dual benefits of rising stock prices and healthy dividends; if the recovery is slower than expected, at least they can still get stable dividend returns.
Article forwarded from: Jinshi Data