Morningstar | CNH Continues to Improve Margins as New CEO Formulates Strategy
Created in 2013 to combine Fiat's commercial vehicle and powertrain businesses (Fiat Industrial) and its agricultural and construction equipment businesses (CNH Global), CNH Industrial was formed to improve upon previously overlooked assets. While the engine technology is shared through its powertrain segment, the collection of assets is varied.The agricultural unit is CNH’s most profitable, generating around 45% of 2017 revenue and 60% of profits. The division’s strong positioning in Europe (market leader) and in North America (second behind Deere) has been the main source of the firm’s profitability. While we believe Deere is the best strategically positioned agricultural manufacturer in developed markets, CNH has gained traction with innovative new products.The construction equipment division--a benefactor of the agricultural business’ manufacturing and distribution channels--is an industry laggard; the segment’s operating margins peaked in 2006-07 at 9%, far exceeding its more recent margins of less than 1% despite generating 10% of industrial business revenue. The downward pressure was initially driven by a slowdown in the U.S. construction market, but since then, the division has suffered from the company’s shift toward maintaining market share at the expense of operating margins.The commercial vehicle and powertrain businesses make up the remainder of CNH’s industrial sales and profits. The commercial vehicle segment’s overall operating margin is thin, primarily because the Iveco brand ranks poorly internationally behind Daimler and Volkswagen. The division focuses primarily on the European market. However, the company’s joint ventures in China with SAIC (34% ownership) and Naveco (50% ownership) allow CNH to gain more international exposure in faster-growing economies. Functioning under the FPT Industrial brand, the powertrain segment helps elevate CNH’s overall margin profile with midcycle operating margins of 5%. Indeed, the powertrain segment is deliberately diversifying away from its historical reliance on intersegment sales toward more lucrative third-party sales.CNH Industrial is a holding company. Through its subsidiaries, Co. is engaged in the design, production, marketing, sale and financing of agricultural and construction equipment, trucks, commercial vehicles, buses and specialty vehicles for firefighting, defense and other uses, as well as engines, transmissions and axles for those vehicles and engines for marine and power generation applications. Co. divides its business activities into three operating segments: Agricultural Equipment, Construction Equipment, Commercial Vehicles, Powertrain, and Financial Services.
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