CNH Industrial - Down With Ag But A Very Well Run Company

| About: CNH Industrial (CNHI)

Summary

Management has cut spending and has initiated a share buy back while the price is low.

If grain prices go higher, so will the stock.

Sergio Marchionne and John Elkann has done a great job running their companies.

CNH Industrial (NYSE:CNHI) has gotten beaten up with the rest of the agricultural industry but is a great company. The stock is down but the company is well run. A rise in grain prices could goose the stock price.

The market cap is $8.6 billion. The dividend for 2016 will be 13¢ and the dividend yield 2%. The stock trades at a price to earnings ratio of 33.4.

Sales were $25.912 billion, down 20.4% from $32.555 billion in 2014. Net income was $248 million, down from $708 million. A better indication of performance is net income before restructuring. This was down to $474 million, from $940 million in 2014. Earnings per share were 19¢, down from 52¢.

Not only was the agricultural division down 27.5%, but every other division was down too. The Commercial Division which makes buses was down 12.4%. Construction was down 24% and Powertrain 20.3%. I think this shows that there is a lot of weakness in the global economy. Ag is down, construction is down, and transportation is down.

A $300 million share buyback program was announced. What a concept. Buyback the stock when the price is low and not when the price is high. I like it. The company is not run by dummies. They cut costs by over $6 billion.

The balance sheet shows $6.311 billion in cash, $19 billion in equipment financing, and $4.1 billion in accounts receivable. The liability side shows $26.388 billion in debt and $15.5 billion in accounts payable. The risk is that customers do not make payments on their equipment and Case must send out the repo man to the farm. I wonder if it's like the reality t.v. shows where the repo man has to sneak in, fire up the tractor, and drive off? All the while, not to let the farmer know so as to avoid a confrontation.

Debt was decreased by about $3 billion from last year and accounts payable by $2 billion. I find this reassuring as we are also bond holders. The dividend was cut too with some of the proceeds used for the share buyback. Capex was cut 33% to $653 million.

48% of sales are in the EU, 30% U.S., 4% Brazil, 5% Canada, and 13% in other countries. Well over 80% from Europe and North America.

Sergio Machione is chairman of the board and John Elkann a director. The two also control Fiat/Chrysler (NYSE:FCAU) and the holding company Exor (OTCPK:EXOSF). Exor holds a 26.95% economic interest and a 39.97% voting interest. I usually don't like funky European dual class structures but I will let it slide as I think we will eventually make money in the stock. Furthermore, I like what Marchionne and Elkann have done with the many companies they run. Southeastern Asset Management is bullish on the stock too.

No doubt, Case is suffering from weak grain prices. Great weather portends low grain prices which portends low ag equipment maker prices. A summer that is too hot or too rainy could lift Case's stock. My one concern with my thesis is that there could be a long term cyclical downdraft in ag and commodity prices. I always differentiate the two as "seven billion people gotta eat". That thesis may be wrong. Demographics and the global economy may be affecting everything and ag will not decouple and go its own way.

Still, sometimes you have to be a value stock picker. You can't always try to second guess the economy because the economy is next to impossible to predict. Case is a well run company with a low stock price. You buy when the stock is low and hope that something good happens and the stock price shoots from $6.30 and goes to $10.

Disclosure: I am/we are long CNHI.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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