CNH Industrial Earnings: Moderating Ag Demand in South America Pressures Third-Quarter Ag Sales

CNH CNHI reported weaker third-quarter earnings than we expected. This led us to decrease our fair value estimate to $15.80 from $16.60 previously. The nearly 5% decline in our fair value is a result of our lower sales expectations for 2023 and 2024. CNH had previously been calling for 8%-11% sales growth in 2023 but has since reduced its target to 3%-6% sales growth. Now, we expect 3% sales growth in 2023, the low end of guidance. Our updated thinking is largely driven by the market challenges in South America.

Management pointed to a few factors holding back demand in South America. First, farmers are contending with declining commodity prices, which weigh on farm incomes. Second, high interest rates are pushing more farmers to question taking on expensive financing to purchase new equipment. The company also highlighted it’s being prudent when it comes to dealer inventories. Putting these factors together, sales were down 4% year over year (on a constant currency basis) due to volume declines and unfavorable sales mix.

That said, we were encouraged by management’s commentary around 2024. While ag industry volumes will likely be lower in the coming year, the company’s leadership believes ag fundamentals remain constructive. For example, fleet ages are elevated compared with past cycles. We think this point will still lead to low-single-digit sales growth in 2024, even if new equipment sales moderate further. The company did point to the potential of farmers still opting to buy new equipment outfitted with precision technology. We think it’d be an easier sell to farmers to retrofit existing equipment with precision ag than buying a new machine.

Overall, despite the weakening ag story in South America, we still view CNH’s shares as undervalued. The market sent CNH’s shares down nearly 8% in intraday trading on Nov. 7 equating to a roughly 34% discount to our $15.80 fair value estimate. We think CNH’s current valuation reflects an attractive margin of safety.