About the company
In the first quarter of the fiscal year 2023, CNH Industrial (CNHI, Financial) experienced a significant boost in revenue, with a year-over-year increase of 15% amounting to $5.3 billion. This growth can be attributed to several factors, including favorable price realization and increased volume. However, the company also faced challenges due to negative foreign exchange headwinds. The Agriculture segment witnessed a remarkable surge in net sales, rising by 16.3% year-over-year. This exceptional performance was driven by strong demand in the row crop market, favorable price realization, and an improved product mix. Similarly, the Construction segment observed a year-over-year sales increase of 5.7%. This growth was primarily fueled by favorable price realization and higher volumes in both North America and Europe.
To sustain its success, CNH Industrial has centered its strategy around five key pillars: innovation, technology leadership, brand and dealer strength, operational excellence, and sustainability stewardship. The company has introduced groundbreaking products such as the TL100 mini-track loaders and the CASE E-series wheeled excavators. By prioritizing premium capabilities and enhancing the operator experience, CNH Industrial continues to push boundaries to meet its customers' evolving needs. CNH Industrial is committed to developing technology that enhances productivity and field experiences for farmers and builders. Notably, the company unveiled its high horsepower, medium-heavy-duty tractor platform last year, combining cutting-edge technology with superior comfort. Leveraged across New Holland and Case IH, the T7 and Optum tractors incorporate standardized components while retaining brand-specific features.
In terms of operational excellence, CNH Industrial aims to achieve annual savings of $550 million by the end of 2024 compared to the 2021 baseline. This should be achieved by improving productivity and the quality of products. The company is also meticulously evaluating approximately 450 vendors worldwide to ensure the selection of the best suppliers. This program will transform the supply chain, leading to sustainable improvements in quality, delivery, and cost beyond 2024.
Revenue outlook
Looking ahead, I believe CNH Industrial should continue its revenue growth for the remainder of 2023, supported by the backlog in both agriculture and construction businesses, which remains higher than pre-Covid levels. Additionally, higher price realization and strong demand, particularly for large agriculture equipment with precision technology, should drive revenue growth. While commodity prices have softened compared to 2022, input costs for farmers remain elevated, creating an opportunity for CNH Industrial's precision agriculture products to deliver efficiency. In North America, the demand for high horsepower tractors remains robust, while industry-wide OEM supply and dealer inventories remain low. Similarly, the South American region exhibits strong demand for CNH Industrial's agricultural products. In the Construction end market, there is a slight softness in demand within the residential and commercial sectors. However, the strength of public construction and the expected increase in spending from the U.S. infrastructure bill should partially offset this weakness.
In the medium to long term, CNH Industrial continues to invest in expanding its precision agriculture product portfolio and developing the next generation of agriculture and construction products. Since acquiring Raven in 2021, the company has hired over 500 tech engineers to drive the development of next-generation precision solutions that seamlessly integrate with CNH Industrial's existing products. Additionally, CNH Industrial announced two acquisitions to further enhance its technological innovation and an additional acquisition to advance its alternative fuel solutions. The first acquisition involves Augmenta, whose technology enhances yields, promotes sustainability and reduces application time, effort, and input costs on tractors and sprayers. Augmenta will operate within Raven. The second acquisition centers around Hemisphere, a global leader in high-performance satellite positioning technology. This acquisition will enable the rapid development of automated and autonomous solutions for both agriculture and construction and is expected to be completed in the third quarter of 2023. Lastly, during the quarter, CNH Industrial obtained a controlling stake in Bennamann, a company specializing in methane capture capabilities, which aligns with the company's commitment to sustainability and a carbon-negative future on farms.
With these judicious and promising strategic investments, CNH Industrial is well-positioned to grow its brands, drive innovation, and achieve revenue growth in the fiscal year 2023. The company's focus on higher price realization, supply chain improvements, and strong demand in its end markets, particularly in agriculture and public construction, should help counterbalance any slowdown in the residential and commercial sectors.
Margin outlook
CNH Industrial's industrial activities, encompassing the Agriculture and Construction segments, demonstrated a remarkable improvement in the adjusted EBIT margin. Year-over-year, the margin increased by 130 basis points, reaching 11.6%. Moreover, it exhibited a sequential growth of 90 bps. These positive developments can be attributed to notable enhancements in addressing supply chain challenges and achieving higher price realization.
Looking ahead, I anticipate that CNH Industrial's margin will continue to benefit from multiple factors. Firstly, the company's focus on higher price realization, coupled with ongoing improvements in supply chain constraints, will contribute to margin expansion. By efficiently managing its manufacturing processes, embracing lean practices, and optimizing operations, CNH Industrial is poised to achieve further margin growth. Additionally, the company's margin will be bolstered by the improvement in product mix, driven by a strategic alignment with market demand, and the leverage gained from strong overall demand. These factors will work in tandem to support the company's margin growth trajectory moving forward.
Valuation and conclusion
Currently, the stock of CNH Industrial is trading at attractive valuation multiples. With a price-to-earnings ratio of 8.31x based on the FY23 consensus EPS estimate of $1.76 and a P/E ratio of 7.95x based on the FY24 consensus EPS estimate of $1.84, the stock presents an enticing investment opportunity. The company continues to enjoy strong demand in its Agriculture end market, which is expected to persist throughout the remainder of 2023. Furthermore, with various projects related to U.S. infrastructure underway, CNH Industrial is well-positioned to capitalize on these opportunities, thereby compensating for the softening demand observed in the residential and commercial end markets. Moreover, revenue growth is expected to be bolstered by higher price realization and ongoing improvements in supply chain constraints. This, in combination with the volume leverage resulting from robust demand, supports a positive outlook for the company's margins. Additionally, CNH Industrial's proactive measures to control expenses further contribute to its overall profitability. Considering the company's promising growth prospects, combined with its attractive valuation, CNH Industrial represents an appealing value investment.
