CNH Earnings: Ag Demand Remains Solid; We View Shares as Slightly Undervalued

We raised our fair value estimate for CNH CHHI to $16.60 from $16.10, largely reflecting the time value of money since our last update. We maintain our view that ag demand will remain solid in 2023. Our thinking is underpinned by the continued undersupply of crops globally, which will drive farmers to plant more. Crop supplies are slightly above cycle lows currently and are showing few signs of improving in the balance of the year. With constrained crop supplies comes higher crop prices, which is putting more income in farmers’ pockets. Crop prices remain elevated, albeit at slightly lower levels compared with the highs seen in 2022.

Turning to the quarter, CNH’s ag segment grew sales by over 3% year on year. Operating margins expanded by nearly 280 basis points compared with the same period a year ago. Profitability was helped by strong price realization. In our view, CNH benefits from pricing power. The company’s brands are high quality, extremely durable, and reliable. Farmers are willing to pay up for farm equipment that is built to last. CN’s machines allow farmers to save on maintenance and repair costs, which are key factors to lowering the total cost of ownership.

Precision ag is now a staple at CNH. We’ve been impressed with the company’s progress over the past couple of years. From the company’s own development efforts to the Raven acquisition a couple of years ago. Similar to peers, we think CNH can automate the entire crop production cycle. We’re eager to see how the company progresses with precision spraying, a technology that both Raven and Augmenta will be able to help CNH with. This leads us to believe that precision ag is a low- to mid-single-digit billion-dollar opportunity for CNH by 2030. Over time, we feel confident CNH can bring to market fully autonomous capabilities.