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Can Deere Find a Worthy Competitor in CNH Industrial?

March 06, 2014 | About:

During 2013, Fiat Industrial increased its presence in the farm machinery market after absorbing CNH Global. The Italian truck manufacturer bought the remaining 15% of its American counterpart, and incorporated in the Netherlands under the name: CNH Industrial (CNHI). The move gave birth to a new mammoth in the heavy machinery industry, which spans across the construction and farm equipment segments. Hence, the object of the following analysis will be to find out whether Deere Co. (DE) confronts a worthy competitor.

Dim Estimates for an Industry Leader

Deere’s management pushed conservative estimates for fiscal 2014. Total sales are expected to decline around 3% due to farmers’ concerns about lower commodity prices. The projections raise questions about the company’s performance, because estimates for 2013 total sales were negative also, and the year closed with a 2.5% increment. Additionally, during 2013 margins in the agriculture and construction widened, while estimates for fiscal 2014 project a 1% decline.

Regardless of estimates, during the first quarter of 2014, Deere Co. experienced a rise on global sales, pushed by higher sales on every segment. Lower commodity prices, however, have tainted projections in North America and Europe, where sales are expected to decline a minimum of 5%. According to management, the drop will mostly affect the agriculture and turf segment.

On the other hand, the continuous recovery of the U.0.S economy and housing market will improve the construction and forestry segment’s performance. However, this segment is considerably smaller and its growth is not expected to outweigh the decline in the agricultural segment. Besides the upcoming difficulties, Deere Co. has a strong enough position to face a challenging environment.

Deere Co.’s financial strength is evidenced by a rise on revenues and net income since 2009. Hence, a higher debt should raise no worries for stockholders, especially because the rise is related to acquisitions that widens product offerings and market presence. Trading at 9.4 times its trailing earnings, the stock carries a 10% discount to the industry average. Nonetheless, the largest stockholder, Warren Buffett (Trades, Portfolio), has registered no transactions since September 2012.

Carrying the Burden

CNH Industrial holds a great potential for growth given the strong brand recognition of the products offered, global presence, and integrated production line. Analysts however, do not grant the company an economic moat yet. As of today, the firm is divided in three segments: farm, construction, and trucks. The first two segments account for about two-thirds of profits and three-quarters of total revenues.

Like its main rival Deere Co., CNH Industrial faces some challenges in the short-term due to a decline in farmers’ confidence related to expected lower commodity prices. The construction segment is also under pressure because of underutilized factories that curtailed operating margins. Nonetheless, the company has a stronghold in the compact-equipment.

The Iveco segment represents a small part of the revenue, but at the same time it holds strong brand recognition. However, its presence is limited to Europe and Latin America. This is a great disadvantage against other competitors like Daimler and Volkswagen. Besides the competitive gap, the merge has generated small or no structural benefits due to a lack of operating synergies.

Financially, CNH Industrial is hard to pin-point but it will have to absorb the great debt accumulated by CNH Global while revenues are expected to remain stable. Trading at 13.6 times its trailing earnings, the stock carries a 30% premium to the industry average. Additionally, gurus have not been too enthusiastic about the merger and no transactions have been reported during the last quarter.

No Match for Deere Co.

As much as many have applauded the merge, CNH Industrial will continue to struggle for some time. A great debt, small synergies, and excess capacity are challenges the new mammoth has to address before turning into the competitor Deere Co. has lacked. Hence, even though Deere Co.’s prospects are conservative, it is the preferable investment for the long term.

Disclosure: Vanina Egea holds no position in any of the mentioned stocks.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


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