Ag Business Drives Moat Upgrade for CNH Industrial

Nick Mokha: We recently upgraded CNH's moat to narrow from none after careful consideration of CNH's brand name and historical profitability in its agricultural equipment division, which comprises 70% of the company's profits.

Strong brand names and reputations have resulted in an agricultural equipment market that is highly concentrated and dominated by three companies: Deere, CNH, and Agco.

In recent years, CNH Industrial has consistently ranked second in the volatile agriculture equipment market, holding an estimated 21% market share relative to wide-moat Deere's 36%.

This oligopolistic structure is a positive for the division's margins. We view the intertwined relationship between farmers, customers, and dealers as a long-term defensible moat, especially from low-cost manufacturers.

CNH Industrial's brand is carried through its dealer network. The company has about 3,300 independently owned agriculture equipment dealers worldwide that operate under exclusivity contracts. We believe dealers want to franchise a brand that is reputable and possesses high-quality as well as guarantees steady aftermarket services in an industry that is inherently volatile, particularly during strained commodity pricing environments where farmers can dramatically curtail capital purchases.

Overall, it's the reputation of the manufacturer and the strength of the dealer network that support farmers' demand for new equipment purchases, continuing product service, and used equipment resale. For example, farmers also expect dependability on their mission-critical equipment for aftermarket services such as for equipment tuning before harvest season.

In closing, we believe this cycle creates a moat source that is difficult for low-cost new entrants to broadly emulate for the foreseeable future. We expect CNH Industrial to benefit from the intangible asset of its brand, supporting its narrow moat.