In the past, I have been very bullish on CNH Industrial (CNHI, Financial), a manufacturer of tractors, heavy equipment and parts. Not only did we own the equity, but also its bond offerings. Upon researching the tractor market, we have noticed that much slightly used machinery is selling at half the price of brand new products. This does not portend good things for the agricultural equipment market.
The problem is that farmers can buy a slightly used tractor often for half-off. In a Richie Brothers auction in St. Louis back in June, two Case 2014 Magnum 220 horse-powered tractors with 2,413 hours and 1,959 hours sold for $91,000 and $86,000. The base price of this tractor is $218,206 brand new — and that is  without all of the extras that the two auction tractors probably had.
In an article I wrote yesterday on John Deere (DE, Financial), I found the same phenomenon with several Deere tractors and combines at an auction in Kansas City. I used a general rule of thumb when comparing used cars to used farm equipment — a thousand hours on a tractor is like 20,000 miles on a used car. So you can see that the two used Case tractors above only have the equivalence of 40,000 miles on them and are selling for 40 cents on the dollar. Mind you that these are large, 220 horse-powered tractors that can accomplish just about anything a farmer needs. My research found John Deere’s had even less hours.
CNH's majority shareholder is the Italian holding company Exor (EXORF), which in turn is controlled by the Agnelli family. The balance sheet shows $5.8 billion in cash, $742 million in accounts receivable, and most importantly $19.1 billion in financing receivables. The liability side shows $5.8 billion in accounts payable and $26.3 billion in debt.
CNH breaks its receivables down into two divisions: retail and wholesale. As of the end of June, the retail division had $10.04 billion outstanding and only $90 million nonperforming. The wholesale division showed $8.824 billion in receivables and only $106 million in nonperforming loans. Thus far, there are no problems. It is what could be coming down the pike that scares me.
Ag sales were down 7.5% to $2.81 billion in the most recent quarter from $3.06 in the same quarter last year. Construction was down 19.6% to $595 million. Commercial vehicles were up 5.1% to $2.595 billion. Powertrain was up 8% to $1.02 billion.
So the question is, if CNH marked its receivables to market, what would they truly be worth? The second question is whether farmers will let CNH repo their tractors and simply buy them back at auction at half off. The third question is why would a farmer want to buy new when they can get slightly used for half-off?
I can’t answer many of these questions, but I know that I don’t want to hold the equity or debt any longer. These problems could already be baked into the stock’s price, but I’m not taking chances. Not only did we liquidate the equity, but we also liquidated most of the debt other than what was due in 2017 and 2018.
We do not own the stock.
