Morningstar | CNH Industrial Increases EPS Guidance Despite Mixed Performance Across Geographies; Maintaining FVE
Despite regional variances in operating performance caused by adverse weather and geopolitical uncertainties, CNH Industrial reported adjusted EPS of $0.18 that beat consensus of $0.15. A strong U.S. dollar caused revenue to decline 4.7% year over year. Revenue was up 1.9% on a constant currency basis. Adjusted operating margin increased 50 basis points to 4.6%, and the firm produced record first-quarter net income of $248 million. In his third earnings call with CNHI, CEO Hubertus Muhlhauser provided no update on its larger product portfolio strategy but increased the midpoint of its 2019 adjusted EPS guidance by $0.01 to $0.87. Taking the solid first-quarter performance and numerous uncertainties into account, we are maintaining our fair value estimate of $12.10.Agricultural equipment revenue increased 1.7% year over year on a constant currency basis in the first quarter. Due to strong sales in Brazil, partially offset by weakness in Argentina, South American combine sales were up nearly 40% year over year. Weakness in Turkey and Australia dragged down segment adjusted operating margin to 6.7% from 7.2%. Increased spending on its precision agriculture technology caused segment research and development costs to increase 19%. We applaud such investments as farming continues to grow more competitive globally with farmers hoping to offset lower commodity prices with higher yields. Yet, we are concerned that a technology arms race may ultimately lead to a precipitous drop in crop prices.
The construction equipment segment continued to perform poorly with revenue down 2.3% year over year on a constant currency basis. Adjusted operating margin improved modestly to 2.0% from 0% in the same period in the prior year. Management cited weakness in the North American residential construction market as a contributing factor. We believe CNHI’s construction segment may be falling behind rival Caterpillar, which continues to introduce products with improved performance.
During the earnings call, management was rather enthusiastic about its latest commercial vehicle product introductions, suggesting that future pruning of this segment may be less likely than we previously anticipated. In this segment the firm improved adjusted operating margin to 2.1% from 2.0% in last year’s first quarter and increased revenue 5.4% on a constant currency basis. In a departure from developments we are witnessing in North America and China, management is placing significant bets on CNG- and LNG-powered vehicles. Even more unusual, these investments have extended to its agricultural and construction equipment. Rapid advancements in battery electric and hydrogen fuel cell technologies make us concerned that the company’s product portfolio may be too focused on natural gas, which essentially is a bridge solution, in our opinion.
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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