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Investment Thesis
CNH Industrial’s (NYSE:CNHI) Q2 outcomes ought to profit from a wholesome order ebook, pricing actions, improved productiveness at amenities, and powerful finish markets. However, the second half of this yr doesn’t look that good with headwinds within the type of uncertainty within the economic system, declining commodity costs, and rising rates of interest. The stock has seen an excellent correction since early June resulting from these issues and is at present buying and selling at simply 8.59x present yr consensus EPS estimates. The long-term outlook for the corporate seems to be good as it’s continually investing in natural and inorganic progress alternatives. The firm’s acquisition of Raven Industries ought to drive the agriculture section’s progress by way of improvement within the precision agriculture area, whereas the acquisition of Sampierana ought to drive the development section’s progress by increasing CNHI’s product portfolio and geography. The firm can be specializing in bettering its margins by way of operational efficiencies and digitalization. I imagine the short-term issues are already getting priced within the stock at present ranges and the risk-reward for long-term traders is beneficial. Hence, I’ve a purchase score on the stock.
Mixed Short-Term Outlook
The demand throughout each the agriculture and development segments remained robust within the first half of this yr, resulting in a wholesome order ebook in Q1 22 and this development is anticipated to proceed in Q2 22 as properly. In Q1, the order for tractors and combines was up 1.4x and 1.2x, respectively, within the Ag section, and the order for gentle and heavy tools was up 1.8x and a pair of.1x, respectively, within the Construction section. The robust demand within the Ag section was pushed by elevated smooth commodity costs, which led to increased farm earnings, whereas the Construction section benefited from the robust housing trade. After the demerger of CNHI’s On Highway enterprise in December 2021, the Agriculture section now contributes probably the most (~70%) of CNHI’s industrial income.
CNHI’s product class efficiency (Company Presentation)
CNHI has been implementing value hikes throughout its enterprise portfolio to offset the inflationary price setting. In Q1 22, the pricing within the Ag section was up 12% and up excessive single digits within the Construction section. The elevated pricing helps the corporate to greater than offset the inflationary prices and enhance profitability. Additionally, the corporate has been adjusting its manufacturing schedules to accommodate elements shortages resulting from provide chain challenges. The stock ranges had elevated within the first quarter in comparison with that in FY21 because of provide chain challenges. However, on the time of the final earnings name, administration talked about that manufacturing in April improved to a sure extent. This ought to help the amount progress of the corporate within the second quarter of FY22. I imagine the gross sales progress of the corporate in Q2 FY22 ought to profit from a wholesome order ebook, pricing actions, robust finish markets, and improved manufacturing ranges.
While I’m anticipating good outcomes when the corporate stories its Q2 outcomes, its outlook past Q2 FY22 seems to be difficult as a result of uncertainty in each agriculture and housing finish markets. Soft commodity costs have been declining since June 2022, which ought to begin affecting the farmer’s earnings because the enter prices nonetheless stay at elevated ranges. This ought to lead to farmer suspending their plans to improve their tools from the prevailing ones. Additionally, the farmer’s sentiment index has been declining over the previous few months resulting from rising inflation and uncertainty within the economic system and has dropped to the bottom degree in June 2022 since October 2016. This ought to influence agriculture finish market. Apart from this, rising rates of interest ought to have an effect on the shopping for energy of individuals, resulting in decrease housing begins which is able to in flip influence CNHI’s development enterprise. I imagine the weaker end-markets ought to influence the amount progress of the corporate in 2H FY22.
Solid Long-term Prospects
At its capital markets occasion held in February 2022, CNHI laid out its 5 strategic priorities to enhance the corporate’s income and profitability. These 5 priorities embrace customer-inspired improvements; model and seller administration; operational excellence; know-how management; and sustainability. These initiatives ought to assist the corporate to enhance its buyer success (measured by Net Promoter Score), acquire market share by virtually 200 bps over the 3-year plan interval, and drive margin growth.
The first precedence is to develop merchandise by coordinating with its prospects and introducing over 200 new merchandise over the following three years, with 150 merchandise in agriculture and 50 merchandise within the development section. Strengthening its model and seller is the following precedence, adopted by giving its seller higher instruments to work with. Operational excellence must be achieved by evolving the corporate’s earlier system of WCM (World Class Manufacturing) to the CNHI enterprise system. The CNHI enterprise system is about driving customer-focused ties, vital advantages for purchasers, and margin growth on the similar time. This must be executed by increasing on lean manufacturing, bettering high quality, bettering productiveness, tradition, and strategic sourcing. Finally, the corporate can be engaged on sustainability and introducing biofuel and electric-driven autos.
CNHI has been increasing its product vary within the agriculture section each organically by innovating new merchandise and inorganically by way of partnerships akin to Monarch and Bennamann, and acquisitions akin to Raven Industries. The firm plans to deliver its first small battery electrical tractors by way of its partnership with Monarch, whereas with Bennamann Solutions it’s making a round economic system mannequin to scale back carbon emissions from the setting. The acquisition of Raven Industries in November 2021 is anticipated to play an essential function within the know-how aspect of the enterprise. Raven’s experience within the precision agriculture area ought to bridge CNHI’s automation hole and assist the corporate increase its product portfolio. The precision ag area is anticipated to contribute to progress with increased content material, particularly on the combines within the excessive horsepower machines, driving market share and margins, that are anticipated to develop additional after 2024 as the combination of Raven is accomplished.
The profitability of the agriculture section has improved over time, and the corporate is constructing on strong foundations that administration expects will ultimately result in mid-teen EBIT margins for 2024, even when the markets have been to melt. The firm is concentrating on producing income within the vary of $16.5 bn to $17.5 bn from the agriculture section in 2024 and an adjusted EBIT margin within the vary of 14.5% to fifteen.5%.
The development section can be benefitting from quite a few world tailwinds and the corporate’s transformation efforts. Significant infrastructure investments are underway, pushed by the infrastructure invoice within the U.S. (which is anticipated to drive progress beginning FY23), the EU’s long-term budget coupled with the next-generation EU program, and different packages internationally. The firm can be engaged on new applied sciences to enhance the effectivity and productiveness of machines. Last yr, the corporate acquired Sampierana, which helped CNHI increase its portfolio of mini and medium excavators. CNHI is specializing in digitalization and automation to ship elevated productiveness and enhance its profitability. The firm is anticipating gross sales within the vary of $3.7 bn to $4.5 bn by FY24 and an adjusted EBIT margin within the vary of 5.5% to six.5%. The administration is concentrating on a complete income together with monetary providers within the vary of $22 bn to $24 bn in 2024 adjusted EPS at round $1.70.
Valuation & Conclusion
If we take a look at CNHI’s valuations, it’s buying and selling at 8.59x FY22 consensus EPS estimates and seven.92x FY23 consensus EPS estimates. The stock value has corrected considerably since early June due to the correction in grain costs. While it should probably influence orders and volumes within the close to time period, I imagine these short-term headwinds are already getting priced in at these ranges. On the opposite hand, I imagine traders are overlooking the corporate’s long term progress prospects at these valuations. Hence, I imagine risk-reward is enticing and have a purchase score on the stock.