CNH Can Release Valuation Brakes With Truck Split

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Includes: CNHI
by: Lipper Alpha Insight
Summary

CNH's vans and heavy goods vehicles are likely to deliver more than a third of the group's $29 billion revenue this year.

But they contribute far less to the group's overall value, thanks to a measly 3% operating profit margin and dismal sales outlook.

Iveco is a relatively weak brand in the highly competitive European goods vehicle market. CNH may spin off this struggling unit.

By Breakingviews

Compared to trucks, tractors look sexy. That observation helps explain why CNH Industrial (CNHI)), the $14 billion Italian-American group backed by Turin's billionaire Agnelli family, may spin off its struggling Iveco commercial vehicles unit.

CNH's vans and heavy goods vehicles are likely to deliver more than a third of the group's $29 billion revenue this year. But they contribute far less to the group's overall value, thanks to a measly 3% operating profit margin and dismal sales outlook. Revenue are expected to contract 1% this year and another 3.6% next, according to Refinitiv forecasts.

Iveco is a relatively weak brand in the highly competitive European goods vehicle market. It has lured customers by guaranteeing to repurchase vehicles after three years at a generous price. These deals are expensive. Stephens analysts estimate a drain of $625 million of cash flow last year, more than twice the $299 million of operating profit.

Investors seem happy to see the back of CNH's vans - hence Friday's 4% share price rise. They're not salivating over Iveco's prospects, but a freestanding group would benefit from more determined management. Alternatively, it could end up adding to a rival's scale in the consolidating global van and truck market.

What is more appealing is the largely agricultural company that would be left after a spinoff. CNH's Case and New Holland farm machinery brands could have some hidden value.

Start with the current CNH enterprise value of $29.5 billion, 10.5 times this year's forecast EBITDA. That is a discount to more profitable farm rival John Deere's (DE) nearly 17 times. A truck-less CNH might support a higher multiple, say, 14 times EBITDA. If it retained all the group's $15.5 billion net debt, the equity market capitalisation would be $11.5 billion, according to a Breakingviews calculation.

Then give Iveco a conservative enterprise multiple of 3 times 2018 EBITDA - half that of 11 billion euro German truck maker Traton. That translates to an equity value of $2.7 billion.

With these conservative valuations, the two-part CNH is worth only 1% more than CNH's valuation after Friday's bump. But the divided group might gain more traction for moving to sunnier pastures.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.