CNH Industrial (CNH +4%) saw healthy gains today, reaching its highest levels since May, following an upgrade to "Outperform" from "Market Perform" at Raymond James.
The agriculture industry has faced setbacks over the past year, resulting in tepid yields for CNH (CNH, Financial), which recently reported its largest year-over-year revenue contraction since mid-2022. Despite ongoing challenges in the ag industry and shaky new construction activity, CNH may have already hit its lowest point.
- What does CNH do? Since spinning off its commercial vehicles and powertrain business in 2022, CNH (CNH, Financial) has focused on manufacturing agricultural and construction equipment. Its brands compete directly with Deere (DE, Financial), AGCO (AGCO, Financial), and Caterpillar (CAT, Financial), as well as various privately held and overseas companies. In agriculture, CNH's brands are known for their similar quality to Deere, fostering strong brand loyalty. Agriculture remains CNH's core business, accounting for over 80% of industrial activity revenues in FY23.
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The ag industry is currently in a downcycle. However, CNH (CNH) has shored up structural costs, production cadence, and sourcing to prepare for this. The company's aggressive cost reduction program aims for $550 million in savings this year. Despite trimming its FY24 EPS outlook twice, CNH's bottom line has held up decently, given its weak top-line performances this year, with revenue contracting by 16.4% year-over-year in Q2 and 9.8% in Q1.
- Cost savings will remain CNH's focus throughout the current cycle. Management is confident in sustaining margin improvements despite industry demand compression, providing a sturdy foundation once demand rebounds.
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The timing of a demand rebound remains unclear. However, CNH (CNH) was optimistic about farmer balance sheets in July, which remain in good shape despite incomes tracking below the 20-year average. Meanwhile, equipment is aging, and new equipment dramatically improves yields, offsetting the higher costs. Although CNH expects the industry to remain flat for a while, it does not anticipate a significant downturn like 15 years ago.
- Deere (DE) discussed similar dynamics last month. A potential catalyst could be replacement demand, which may boost sales sooner as interest rates ease. New equipment offers tangible benefits, such as greater yields and increased efficiency. Additionally, while incomes are stagnant, rising farmland values keep farmers' financials relatively sound.
While the outlook for CNH (CNH) and the broader ag industry is not entirely sunny, conditions are not worsening significantly. With interest rates coming down, CNH's cost-saving initiatives should maintain profitability. Additionally, right-sizing dealer inventories will reduce used inventory on lots, encouraging consumers to purchase new equipment.
