CNH Industrial N.V.

Moat: 2.5/5

Understandability: 2/5

Balance Sheet Health: 3/5

CNH Industrial N.V. is a global leader in the capital goods sector, specializing in agricultural and construction equipment, as well as related services. It is a Dutch company, listed on the NYSE.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview and Recent Developments

CNH Industrial operates across three primary segments: Agriculture, Construction, and Financial Services. Their products range from tractors and combines to bulldozers and excavators, and they also provide financing solutions for their customers.

  • Revenue Distribution:
    • Agriculture: This is the largest segment, encompassing farm machinery and equipment. In Q3 2023, Agriculture represented $5.83 billion of CNHI’s $7.58 billion in total revenue.
    • Construction: This segment includes construction machinery, such as excavators and bulldozers. In Q3 2023, it had a revenue of $1.20 billion.
    • Financial Services: This division provides financing for the purchase of CNHI equipment and related services, as well as wholesale financing for dealers. In Q3 2023, it recorded a total revenue of $595 million.
  • Industry Trends:
*   **Agricultural Sector:**  The agricultural sector has seen a mixed trend, with lower sales volumes but relatively flat industry profitability. Growth is supported by the need to improve productivity and efficiency, which often requires investment in newer machinery.
 *   **Construction Sector:** This industry has seen an increase in the demand for construction equipment, particularly in the infrastructure space.
*   **Financial Services:** The financial services sector is impacted by interest rate hikes, and by a general increase in risk awareness within the broader market.
  • Competitive Landscape:
    • The market is competitive, with other big players like Deere, Caterpillar and Komatsu who can dominate market share through scale, brand and price.
    • The company faces a constant pressure to innovate and enhance features, while maintaining price levels that can compete with peers from the same industry.
  • What Makes CNH Different:
    • CNH leverages on technological advancements with precision agriculture, autonomy, and alternative fuel technologies as a differentiator.
    • The company also seems to focus on a mix of global and regional brands, allowing it to focus on a broader audience.
  • CNHI is implementing a technology focused strategy in its products to increase efficiency and improve margins.
  • The company also recently announced the launch of a new capital markets program to reduce it’s net debt and improve credit rating, which would help reduce their finance costs.

Financial Analysis

CNH Industrial’s financial performance has been volatile, with noticeable impacts from global and regional factors.

  • Historical Performance: Looking at CNHI’s financials, the company has consistently shown an improvement in revenues and earnings over the recent years. The reported revenue was $7.58 billion in Q3 2023 compared to $6.72 billion in Q3 2022. Net income has risen to $531 million from $300 million in the same period. This is a strong result but it can be a product of favorable market conditions.
  • Profitability: The company’s operating profit margin for Q3 2023 was 8.4%, a big increase from last year’s 3.2% in the same quarter. This also is mainly a result of increases in sales and efficiency in the operating side of the business.
  • Free Cash Flow: The company’s cash flows have also turned positive, with free cash flow for Q3 2023 being $275 million, compared to $813 million used in the same period last year. This is largely due to a reduction in working capital needs.
  • Leverage: The company’s long term debt stands at $12.8 billion (2023) and there are short-term obligations of more than $4 billion. With positive free cash flow, debt may come down but if debt is not managed, this will be a huge risk to the company. CNHI’s equity is $29.8 billion.
  • Challenges: Though the recent results are positive, the company operates in a volatile and uncertain economic environment, with high input costs and changes in geopolitical trends, which could negatively impact profitability, and has impacted it in the recent past. The company needs to balance out the risks and leverage.
  • The company has also disclosed a material weakness in their internal controls over financial reporting, which could potentially lead to an uncertainty in financial reporting, which also requires management’s time and attention to resolve.

Moat Assessment

Based on these factors, I assign CNHI a Moat Rating of 2.5 out of 5.

  • Intangible Assets: CNHI benefits from brand recognition, particularly in the agriculture segment, as well as some proprietary technology, but these intangible assets aren’t strong enough to provide a wide moat.
  • Switching Costs: There are moderate switching costs for the customer of heavy machinery equipment, but is not enough to build a wide moat since the technology is easily replicated by competitors.
  • Network Economics: CNHI’s business does not benefit from a significant network effect.
  • Cost Advantages: Some minor cost advantages from scale and specific locations are observed but aren’t substantial to create a lasting moat since other players from the same industry are competing using same strategies.

CNH has a presence and a hold on several niche markets and that combined with a strong brand recognition will allow it to maintain moderate level of sustainable profitability going into the future. The company can also create additional advantages by leveraging technology and innovating new product lines to enhance brand reputation.

Business Resilience and Risks

  • Business Resilience: CNHI’s geographic diversity should help it with any local regional issues, and their ability to adapt to various market trends show that the company has a high resilience. That said, the company’s dependence on manufacturing does make them vulnerable to supply chain disruptions.
  • Risks to the Moat: * Commodity Price Fluctuations: As a supplier for the agricultural industry, price swings in crops can impact farm income, which affects the sales of CNHI’s equipment. * Economic Cycles: CNHI’s performance can be closely linked to macroeconomic cycles, resulting in volatile performance and revenue generation. * Technological Obsolescence: The technological trends are moving faster than ever before, and the company’s long-term moat can be severely impacted if it doesn’t innovate and maintain a lead over competitors. * Global Competition: Aggressive pricing, and innovation of competitors could potentially impact CNHI’s market share, and hurt their overall profitability and ability to maintain their moat. * Supply Chain Issues: The nature of manufacturing operations and reliance on raw material supply chain can lead to delays, supply issues, and a decline in production.

Understandability Rating

I give CNHI an Understandability Rating of 2 out of 5.

  • CNHI’s financials and operations can be very complex, especially the nature of its subsidiaries.
  • It operates in many geographies with different product lines and hence it’s hard to fully grasp how their profitability comes about. It’s easier to understand the main concept, but the details can be hard to track down.

Balance Sheet Health Rating

I rate CNHI’s balance sheet health as 3 out of 5.

  • While the company has made efforts to reduce debt, it has been a concern in the past and could be a problem in the future if the company cannot manage and generate enough cash flow to keep its net debt in control.
    • Also the company has had some bad track record of accounting and disclosures in the past that would affect their financial position.
    • However, with improving free cash flows, and management’s focus on reducing debt and finance expenses, the balance sheet could look healthier over the long term.