The megatrend of emerging markets driving increased food demand
is nowhere more apparent than in the fortunes of farm machinery
) who just reported blow-out first quarter results.
CNH is the number-one manufacturer of agricultural tractors and
combines in the world, the third-largest maker of construction
equipment, and has one of the industry's largest equipment finance
The company's two brand families, Case Corporation and New Holland
N.V., are sold through dealers and distributors on a worldwide
basis and you may be surprised to learn that the company is 90%
owned by Fiat Industrial of Italy. This will become important in
Big Beat From the Farm
On April 30, CNH reported Q1 EPS of $1.33 vs consensus expectations
of $0.95. This upside surprise was due primarily to strong farm
equipment sales in Latin America with industry growth in tractors
of +24% and combines of +54%. Market share gains also helped the
Agricultural revenue of $3.9 billion was above consensus of $3.5
billion, but construction revenue of $754 million missed consensus
of $942 million.
According to analysts at William Blair, "This dynamic was expected,
especially after CNH's largest dealer,
), demonstrated results that showed a similar pattern. Farm
equipment earned a healthy 11.9% margin in the quarter (30%
incremental) but construction equipment lost $26 million on the
weaker production and demand."
The company stuck to its full-year targeted revenue growth of 5%
and operating margin guidance of 8.5% to 9.0%. Several analysts
view the company's guidance as consistently conservative and
believe that CNH can probably exceed these targets given that the
first quarter operating margin came in at 9.4% and Latin American
demand for farm equipment is expected to remain strong.
Again from William Blair, "Essentially, the company's construction
outlook is weaker than initially forecast, while the agricultural
equipment is stronger than what prior guidance implied. Based on
the company's backlog in farm equipment, order boards go out to the
third quarter, so there should be some comfort that targets are
achievable on the farm machinery side of the equation."
Estimates Boosted and More to Come
Two weeks before the company's report, analysts were raising
estimates sufficiently to bump CNH to a Zacks #2 and then #1 Rank.
Now those estimates are being quickly boosted again.
As of April 30, the 2013 consensus stood at $4.92. Some analysts on
May 1 were already seen raising the full year in a range of $5.07
to $5.25. As these upward revisions filter in, CNH will likely
maintain its high Zacks Rank.
So Why the Drop in Shares?
After CNH's report on Tuesday, the stock fell over 9% to $41. This
was primarily due to a weak report and guidance from its parent,
Fiat Industrial, whose shares dropped as well.
Why should this affect CNH? Until the takeover is complete this
year, CNH shares basically trade in lockstep with Fiat Industrial
given that CNH's value is determined by the established exchange
ratio of 3.8 for the minority stake.
Most analysts believe that Fiat already trades at a steep discount
and that this turn of events should not affect CNH shares for long.
Combined with the fact that CNH is trading at roughly 8 times 2013
estimates, it might pay to buy this dip.
The real risks to keep in mind with CNH, according to JPMorgan
analysts, are its overproduction in agriculture equipment vs.
retail sales of 19% in anticipation of stronger demand in Q2 and
Q3. Should the demand not materialize, the company would face a
tough inventory correction.
Bottom line: Keep your eye on the rising EPS estimates for CNH. If
the company's ability to expand farm equipment sales continues to
outpace softness in construction, 2014 consensus estimates of $5.28
have upside risk.
Kevin Cook is a Senior Stock Strategist with
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