Overview
I remain positive and bullish on the fundamental part of the CNH Industrial (NYSE:CNHI) but acknowledge that I underestimated the impact of shifting to NYSE. The stock proceeded to trade down much further than I thought. Technicalities aside, fundamentals remain strong as CNHI continues to drive resilient results, especially from a margin perspective. For the most part, CNHI is on track to meet the financial goals for 2024 that were established at the 2022 Capital Markets Day. I am positive CNHI can achieve this given the progress of its Operational Excellence-driven savings (expected total run rate of more than $550 million), which I expect to be completed by next year. This suggests CNHI can expand its margin by 220bps from 2022 levels, and if we assume that it can achieve a quarter or 1/3 of it this year, this implies margin can expand by ~50 to 70bps without any improvement in sales. All in all, I remain positive on CNHI based on my previous model as everything seems to be on the right track even though the share price traded down.
Agriculture market
I anticipate a rapid uptake of orders from dealers as CNHI releases the list prices for its model year 2024 equipment and opening of order books in the fourth quarter. The key reason (as stated previously) is that in North America, dealers are facing a shortage of large agricultural machinery due to persistently low inventory levels. On the other hand, while I had my doubts about Brazilian demand in the previous quarter, I see positive momentum for the coming quarters as CNHI reported that the country’s retailers have seen sales increase and inventory levels drop compared to 4Q22. Good things aside, I anticipate that sales of smaller farm machines will continue to fall as dealer stockpiles approach their optimum levels. I am heartened to learn that management is increasing production of large agricultural equipment while decreasing production of small agricultural equipment, as they continue to express optimism about the demand for such machines in both North America and South America. Based on my evaluation, this tactic should increase gross margin rate in North America due to product mix by the end of the year. All in all, consistently low dealer inventories and robust farm profitability in the face of lower commodity prices and a flattening yield curve all bode well for 2024.
Construction market
Despite a slight increase in light CE dealer inventories during the first quarter, the CE market as a whole continues to suffer from low inventories. Management has consistently characterized the state of the construction market as robust, justifying increases in production for selected products. Several factors, in my opinion, point toward moderate growth for CNHI in the CE market. For instance, new product launches, low dealer inventory, and shifting market dynamics like a strong housing market and stimulus-driven demand from IRAs are all contributing to this optimistic outlook. I expect sales in the CE market should remain buoyant as a result of these factors throughout the year. Looking at the most important indicator, orders, we can also see that things are looking good, with the order book being completely booked through 3Q. When measured against historical averages, dealer stock in this market segment is comparatively low, especially when looking at the inventory-to-sales ratio. Although things appear to be going well, I would advise tempering expectations because the CE sector is more vulnerable to economic slowdowns than the Ag sector.
Pricing
I anticipate CNHI’s 1Q23 price advantage to persist through 2Q but wane in 2H23 as the price increase timing laps vs last year. However, as the year progresses, the savings from cutting costs should become more noticeable in the books, easing the financial blow from the ease of pricing impact. Notably, both steel prices and shipping costs have decreased. In addition, there is mounting proof that improved supply chain stability has boosted operational efficiencies and bolstered margins in both segments. Positive price-to-cost dynamics persisted, with the current quarter’s benefit being even more pronounced than the one before it. Long-term, management remains committed to realizing annual savings of roughly $550 million by the year 2024. I believe that CNHI will be able to increase its profit margin in 2023 as a result of streamlined operations in the supply chain and refined product design.
Conclusion
My overall outlook on CNHI remains positive and bullish. From a fundamental perspective, CNHI continues to demonstrate resilience and strong results, particularly in terms of margins. The company is on track to achieve its financial goals for 2024, driven by cost savings initiative. The anticipated rapid uptake of orders from dealers, along with the positive momentum in the Brazilian market, further support the positive outlook for CNHI’s agriculture segment. In the construction market, although dealer inventories remain low and the sector is susceptible to economic slowdowns, factors such as new product launches and a strong housing market contribute to a moderate growth forecast. The pricing dynamics are expected to normalize, but cost savings and improved supply chain stability should mitigate any impact on margins. Overall, I maintain my positive stance on CNHI stock as it progresses towards its goals and shows resilience in challenging market conditions.
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