CNH Industrial: Limited Upside Amid Market Challenges (NYSE:CNH)

Thomas BarwickIntroduction CNH Industrial (NYSE:CNH) is a prominent player in the industrial manufacturing sector, boasting a diverse portfolio of agricultural and construction equipment. Over the past five years, shareholders have seen a 10% increase in the share price, significantly trailing the wider market. With its robust business model and solid product portfolio, could CNH Industrial see greater success in the future? While I anticipate that CNH Industrial will continue to generate positive returns for shareholders in the coming years, it is likely these returns will not be particularly exceptional. As such, I am inclined to assign the shares a “hold” rating. Company Overview CNH Industrial, formed in 2012 through the merger of CNH and Fiat Industrial, is a multinational corporation focused on the design, manufacturing, sale, and financing of agricultural and construction equipment across the world. Its extensive product range, including brands such as Case, New Holland, and Iveco, makes it one of the largest players in the sector, with the second-highest market share globally in the sale of agricultural equipment. Over 70% of its revenue is derived from agricultural equipment, with construction and financing revenue making up the rest. This revenue is globally diversified, with North America being the largest market, responsible for 46% of revenues. Through strategic initiatives such as restructuring plans to reduce costs and targeted takeovers of firms such as Hemisphere and Augmenta to enhance their product offerings, CNH Industrial continues to strengthen its position in the global market. Competitive Advantages CNH Industrial has several competitive advantages. A key advantage stems from the company’s diverse and reputable brand portfolio, including Case IH and New Holland, ensuring strong brand recognition and a strong market presence. Operating on a global scale enables CNH Industrial to have economies of scale in its manufacturing, and, combined with its large dealer network, ensure customers have efficient aftermarket support, reinforcing customer confidence and helping to drive repeat business. With high barriers to entry for new manufacturers due to high capital requirements, CNH Industrial faces competitive pressure largely from existing large manufacturers. With the 5 largest agricultural equipment manufacturers having a market share of over 63%, the market operates as a semi-oligopoly, suggesting above-market returns. With CNH Industrial’s continued focus on enhancing its technology through its takeovers of Hemisphere and Augmenta, the company looks set to continue innovating to set itself up to remain competitive in the future. Q1 Results On 2nd May, CNH Industrial announced their results for Q1, 2024. Overall revenues came in at $4.82 billion, beating expectations by $180 million, but representing a fall of nearly 10% year-on-year. Earnings per share came in at $0.33 a beat of almost $0.07, but again a fall from the previous year. Overall margins fell slightly with margins in the agricultural segment falling 200 bps to 12.5% only slightly offset by a 150 bps increase in margins in the smaller construction division to 6.7%. Q1 2024 Results PresentationAll business segments saw falls in revenue during the first quarter, with the larger agricultural segment seeing a larger drop of 14% in revenues against the construction segment’s 11% drop. The drop in construction sales is particularly concerning, as CNH Industrial has in recent years focused on growing this segment to not be so reliant on agricultural sales. Overall, North America remains the largest market, with EMEA the next largest. CNH Industrial continued its program of cost reductions and restructuring, which it anticipates having contributed to $70 million of cumulative gross savings as of Q1. This program is anticipated to continue in the following quarters. Q1 2024 Results PresentationDespite these savings, CNH Industrial cut their sales outlook, with revenue anticipated to fall between 10%-14% this year against the smaller fall of 8%-12% guided. This led to a corresponding cut in earnings guidance, with adjusted diluted earnings per share anticipated to come in at $1.45-$1.55, a reduction of $0.10 compared to previous guidance. Overall, these results demonstrate a mixed performance. While revenue and earnings came in above expectations and cost savings continue to occur, the decline in agricultural margins and fall in all industrial segment’s revenues is particularly concerning. It is important to also consider we are currently in the decline part of the agricultural cycle, so a fall in revenues in this segment is not entirely unexpected, however with the cost savings taking place, a decline in margins is a concern. Valuation To value CNH Industrial, I employed an EV/EBITDA methodology for the period to 2026. I assumed the share count would remain constant at 1,260 million and for purposes of simplicity, I assumed cash and debt levels remain constant. I expect CNH Industrial’s EBITDA margin to be 13.5%, slightly higher than the average over the past 5 years, but similar to more recent years and taking into account the continued integration of new acquisitions that should boost margins in the coming years. For future revenue, I used analyst estimates on Seeking Alpha, given their comprehensive industry insight and market trends. Created and calculated by the author based on CNH Industrial’s Financial Data found on Seeking Alpha and the author’s projectionsTo determine an exit EV/EBITDA multiple, I took the midpoint of the company’s 5-year average of 16.14 and the industry average of 11.33, giving an exit multiple of 13.735. This method to determine the exit multiple balances CNH Industrial’s historical valuation multiple, with that of similar companies in the wider industry. This takes into account both trends in the industry, CNH Industrials valuation compared to peers, and CNH Industrials historic performance. Performing the calculations implies a market cap of $18.5 billion at the end of 2026. With an estimated 1,260 million shares outstanding, this corresponds to a price target of $14.68 per share, an upside of 27% from the current price of $10.11 per share, for a CAGR of 15.5% over the next 30 months. CNH Industrial also pays a dividend of $0.40 per share annually, for a dividend yield of 4.09%, helping to boost shareholder returns further. Further upside could also come from the $500 million further share buyback announced following Q4 results, which is currently ongoing. Risks When considering an investment in CNH Industrial, there are two main risks I believe it is important to consider. Firstly, debt levels. CNH Industrial currently has a debt burden of $27.7 billion, resulting in a debt-equity ratio of 3.5. This is significantly higher than competitors such as Deere (DE) on 2.91 and AGCO (AGCO) on 0.26. Elevated debt levels expose CNH Industrial to fluctuations in interest rates, leading to substantial interest expenses of $124 million over the past 12 months. Despite this high debt load, the company’s credit rating was raised last November by S&P Global, from BBB to BBB+, with a stable outlook. However, further increases in interest rates could escalate debt servicing costs, potentially reducing profitability. Secondly, climate change poses another significant risk. With climate change increasingly impacting farming practices, including altering growing patterns, CNH Industrial faces potential disruptions in demand for its agricultural equipment. Changes in regional agricultural conditions may prompt shifts in customer purchasing decisions, while evolving environmental regulations may impact product preferences and product standards. While climate change adversely affects certain regions, it could potentially improve crop production in others, such as Northern Europe, offsetting declines elsewhere. Nevertheless, the constant need for agricultural equipment to support food production highlights the resilience of CNH Industrial, and they look set to navigate changes in product preferences aptly. Conclusion CNH Industrial reported a fairly solid quarter, exceeding expectations. With the agricultural segment currently in a down-cycle, the falls in revenue and earnings compared to the previous year is not something I believe is a major worry. However, while my calculations suggest there is potential for an increase in share price over the next few years, with a projected return of 15.5% CAGR, the expected returns are modest compared to the risks facing the company and the needed margin of safety when investing in an individual company. Therefore, I assign a hold rating at this time. With an ongoing cost-cutting program, I will continue to monitor the company’s progress, watch the broader agricultural industry for signs of an upturn in the agricultural cycle, and watch for changes in monetary policy which should provide a boost to CNH Industrial from reduced interest expenses and higher product demand. In summary, I assign a hold rating and will continue to monitor the company for potential changes in outlook.

Buy cryptocurrency

Source link

Refer And Earn Demat Account – Get ₹300 | Referral Program

Open Demat Account In Angel One For FREE