Investments In Precision Tech And Production Upgrades Will Strengthen Competitive Position

Key Takeaways

• Strategic sourcing and cost-saving initiatives are projected to enhance profitability by improving net margins through reduced inventory and procurement savings.
  
• Investment in precision technology and quality upgrades aims to boost revenue, competitive positioning, and market share as demand rebounds.
  
• Reduced industrial demand, lower shipment volumes, and high dealer inventories are negatively impacting CNH Industrial's revenues and margins amidst declining commodity prices and geopolitical uncertainties.

Catalysts

An equipment and services company, engages in the design, production, marketing, sale, and financing of agricultural and construction equipment in North America, Europe, the Middle East, Africa, South America, and the Asia Pacific.

• CNH Industrial plans to reduce channel inventories and focus on achieving leaner inventory levels throughout 2025, setting the company up for improved sales and net margins once demand picks up.
  
• With a continued emphasis on cost-saving initiatives, CNH Industrial achieved a run rate saving of around $600 million. These structural cost reductions are expected to enhance net margins and profitability in the long term.
  
• The company is ramping up its in-house precision digital technologies with an increased take rate of its own factory-fit components, which could potentially boost revenue and improve net margins due to technological advancements and competitive positioning.
  
• As CNH Industrial upgrades its production lines and processes and invests in quality improvements, it aims to increase market share. This strategic focus is likely to enhance both revenue and net earnings as the market demand recovers.
  
• CNH Industrial's strategic sourcing program is expected to contribute significantly to future cost reductions, potentially improving net margins and earnings as procurement savings kick in more robustly in the coming years.

CNH Industrial Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CNH Industrial's revenue will decrease by 2.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.3% today to 7.6% in 3 years time.
• Analysts expect earnings to reach $1.4 billion (and earnings per share of $1.28) by about March 2028, up from $1.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.7 billion in earnings, and the most bearish expecting $1.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.4x on those 2028 earnings, up from 13.0x today. This future PE is lower than the current PE for the US Machinery industry at 21.4x.
• Analysts expect the number of shares outstanding to decline by 0.75% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.59%, as per the Simply Wall St company report.

CNH Industrial Future Earnings Per Share Growth

Risks

• CNH Industrial is facing reduced industrial demand and lower shipment volumes, especially in North America, Europe, and South America, which could continue to impact its revenues negatively.
  
• Declining commodity prices and consequent depressed farm incomes are leading to softness in equipment demand, which poses a risk to future revenue streams.
  
• Dealer inventories are at higher-than-ideal levels, necessitating continued reduced production, which could adversely affect short-term revenue and margins until alignment with retail demand is achieved.
  
• Increased warranty expenses and unforeseen geopolitical uncertainties could further erode net margins despite ongoing cost-saving initiatives.
  
• Potential trade tariffs could affect component costs, necessitating production relocations or price adjustments; these dynamics may increase operational costs and impact earnings negatively if not managed properly.

Valuation

• The analysts have a consensus price target of $14.974 for CNH Industrial based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $21.0, and the most bearish reporting a price target of just $11.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $18.7 billion, earnings will come to $1.4 billion, and it would be trading on a PE ratio of 18.4x, assuming you use a discount rate of 12.6%.
• Given the current share price of $13.02, the analyst price target of $14.97 is 13.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.