Morningstar | CNH Experiences Flat Revenue as Operating Margins Improve
During the third-quarter earnings call, new CNH CEO Hubertus Muhlhauser provided results on a modestly profitable quarter but little information on his future strategy. Muhlhauser, who became CEO in September, explained that more information about the company’s strategic review would be available in 2019. He did share that the number-one priority is to continue improving margins. There was some success in this regard as operating margin rose to 5.1%, from 4.1% in the third quarter 2017. We maintain our narrow-moat rating and slightly lower our fair value estimate to $12.10 from $12.40.Year-over-year sales expanded 3.5% in agricultural equipment and 17.5% in construction equipment, while declining 6.6% in commercial vehicles and 9.5% in power train. The increase in agricultural equipment sales was primarily due to higher sales volumes in Nafta and improved price realization across all regions. Construction equipment had favorable results because of strong demand in Nafta and APAC. Commercial vehicles experienced a decline in revenues primarily due to weak demand in EMEA. Lastly, power train witnessed a decline in revenue due to timing related to new stage-V engine sales. All segments reported higher margins compared with the same period last year.
Through improved efficiencies and lower warranty costs, the company was able to offset raw material headwinds and improve its operating margin. Overall, management believes cost headwinds related to tariffs will only be $50 million-$100 million for the year. Yet, these headwinds are not deterring management's plans for new product introductions in 2019.
Notable during the call was management's discussion of its continued interest in sustainability and innovation. The company expressed its desire to maintain leadership in LNG powered equipment going forward, anticipating it will be a bridging strategy until fuel cell powered equipment is available in five to six years. Management was also positive about electrification for its buses but feels that it doesn’t make sense for heavy duty trucks at this time.
While little information was given about 2019, management did discuss possible synergies among the four segments. As we wait for more information about the company’s strategy going forward, we see few catalysts to move the stock price.
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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