Morningstar | CNH Harvests Strong Global Demand, Expands Margins; Expects Solid Demand in the Second Half of 2018
CNH grew total revenue 15% to $8 billion with strength in every reporting sector. Year-over-year sales expanded 20% in agricultural equipment, 23% in construction equipment, 11% in commercial vehicles, and 7% in powertrain--enviable growth for an industrial, indeed. CNH also improved adjusted industrial operating income 52% year over year with adjusted EBIT margin of 7.4% versus 5.7% in the year-ago period. Financial services improved operating margin 320 basis points, to 28.9%. We maintain our narrow moat rating and expect any fair value estimate change to be minor as we true up our model.Investors across industrials are concerned about the consequences of tariffs and trade restrictions. Concerning exposure to raw material price increases, CNH indicates staggered supply contracts and cost savings measures insulated the firm in the first half of this year and expects price increases will protect second-half results.
In the quarter, unit sales grew in all segments (ag, commercial construction, and commercial vehicles) and all four geographic regions, with the exception of tractors in EMEA and Latin America (NAFTA and APAC tractors were up 9% and 11%). Looking forward, management expects strong sales in all three segments and four regions, except for possible flatness in Latin America and declines only in EMEA tractors—that's a lot of positivity in a time of low agricultural commodity prices. The firm guides to $28 billion of industrial sales and $0.67-$0.71 of EPS, a slight increase from the prior $0.65-$0.67, stemming half from tax rate reductions and half from performance better than previously expected. We think these projections may be cautious due to the possibility of trade wars between the U.S. and Asia and Europe.
In addition to leading Fiat-Chrysler, the esteemed leader Sergio Marchionne was also chairman of CNH Industrial. Due to Mr. Marchionne's failing health, Suzanne Heywood was appointed chairman July 21. Marchionne passed away this week.
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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