CNH Industrial (CNHI) is a major producer of agriculture (80% of sales) and construction (20% of sales) equipment. Its shares have slid from their peak and now trade essentially unchanged over the past 20 years, making them look attractive, explains Bruce Kaser, editor of Cabot Turnaround Letter.
Many investors see an average cyclical company at the cusp of a downturn, with a complicated history and share structure. But we see a high-quality and financially strong company that is improving its business prospects while simplifying itself, yet its shares are trading at a highly discounted price.
CNH owns high-quality brands that include Case IH and New Holland. The company is highly profitable, with earnings expected to be $2.1 billion in 2024. Free cash flow for its Industrial operations will be about $1 billion.
The Industrial segment balance sheet carries $3.7 billion in cash compared to its $4.6 billion in debt. CNH’s financial segment, whose only business is providing financing for end-customers and dealers of its equipment, is conservatively capitalized (9.7% equity ratio) and generates a 12%-13% return on equity.
The company’s complicated history includes one-time ownership by Fiat, the Italian manufacturing conglomerate, along with being combined with the Iveco truck, bus, and engines business. However, this murkiness is being cleaned up, notably by the separation from Iveco in 2021. That leaves only farm and construction equipment along with the in-house financing business.
A legacy of its Fiat days, CHN’s shares currently trade in Milan and New York. This dual-exchange complexity is now being removed. CNH is de-listing its shares from Milan and transitioning all of its share trading to the New York Stock Exchange, effective in early 2024.
Near-term, this transition is likely weighing on the share price as Milan traders unwind their positions, so CNH is implementing a $1 billion share buy-back program, with a completion date of March 31. For perspective, the $1 billion would repurchase about 7% of the company’s shares.
Relatively new CEO Scott Wine, who previously led Polaris (PII) to success, is implementing efficiency programs totaling about $800 million (nearly 4% of revenues) to make CNH more profitable at all points in the cycle. Removing the legacy inefficiencies from its Iveco era is a key component of these programs.
The company’s shares recently traded at 6.1x per-share earnings. This compares to 12x for Deere and Caterpillar and 7x for Agco. On an EBITDA basis, assuming only book value for the financial segment, CNH’s shares trade at 4.2x EV/EBITDA – also a sizeable discount to its peers.
The shares offer an attractive 3.7% dividend yield that looks well-supported by cash flow and the balance sheet.
