CNH Industrial Undervalued With Strong Ag Demand Likely To Persist

 

If you only looked at used farm equipment prices, you probably wouldn’t expect to see that farm equipment stocks have been weak. While an over-aged equipment base in North America and supply chain-driven production challenges have sent used equipment to record highs (as per Machinery Pete’s quarterly index), AGCO (AGCO) and CNH Industrial (CNHI) shares are down from the time of my last article on CNH, and Deere (DE) is barely positive and may well be in the red too by the time this is published.

I understand concerns about higher rates, supply chain issues, and now the Russian invasion of Ukraine, but with a strong outlook for ag equipment demand over the next couple of years, I’m honestly surprised that CNH shares haven’t held up better, particularly with the spin off of IVECO (IVCGF) complete. While conservative guidance from the recent investor day doesn’t help near-term sentiment, and geopolitical risk is now front and center, I do believe that CNH shares are worth another look even in a weak environment for sentiment on machinery stocks.

 

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CNH Industrial Undervalued With Strong Ag Demand Likely To Persist

CNH Industrial Early In Its Self-Help Story, With A Cyclical Boost Today

Between the hiring of a new CEO and a broader run in heavy machinery stocks, I can't say that CNH Industrial (CNHI) hasn't performed over the past year, with the shares up over 55%. With the shares only just back to where they were in early 2018, though, there have certainly been some issues with the business in recent years, including inconsistent execution in agriculture and more structural challenges in the construction business.

I believe the new CEO, Scott Wine, has a good plan for improving the ongoing ag and construction operations (the on-highway operations are going to be spun off or sold), and it's important to remember that CNH doesn't have to catch up to Caterpillar (CAT) or Deere (DE) in terms of operational performance for the shares to still work from here. Between internal self-improvement opportunities and stronger markets for heavy machinery in the ag and construction markets, I believe CNH shares still have some upside after this big move, and it's a name worth considering.

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CNH Industrial Early In Its Self-Help Story, With A Cyclical Boost Today

Dover's Core Doing Okay And New Management Brings New Options

I’ve never hid the fact that Dover (DOV) is not among my favorite companies, and over a longer-term holding period, you’d still have done better with names like 3M (MMM), Illinois Tool Works (ITW), Fortive (FTV), Danaher (DHR), and Ingersoll-Rand (IR). That said, Dover shares have been performing meaningfully better on a relative basis over the past couple of years, first with the recovery in the energy sector, then the spin-off of Apergy (APY), and what I believe is building optimism about what a change at the top (a new CEO) could mean in terms of self-improvement.

My complaints about Dover have largely centered around low margins/elevated expenses, weak returns on capital, and a collection of businesses with iffy long-term strategic value. New CEO Richard Tobin seems eager to start work on the expense side of the equation, and I wouldn’t rule out the possibility of management shuffling the deck a little further down the road (selling some businesses and perhaps buying some new ones). While I’m warming up to Dover from a strategic perspective, the valuation still isn’t all that enticing to me, though a longer run of this industrial up-cycle could certainly generate some upside to my expectations.

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Dover's Core Doing Okay And New Management Brings New Options

Seeking Alpha: Is AGCO Corp. Washed Out Enough To Own?

The rise and fall of the agriculture equipment cycle has gotten plenty of attention, but I don't think it's all that widely appreciated that AGCO (AGCO) has done reasonably well over that cycle - beating Deere (DE) over the past two years and keeping pace over the last year (and beating CNH Industrial (CNHI)). More recently, it seems that some on the sell side have favored AGCO as a "better house in a bad neighborhood" play, but the company is still facing challenges, with share loss in Brazil and weaker relative margins, and AGCO's recent guidance was not particularly strong. The valuation on these shares does look interesting, but investors need to be aware that they're swimming against the tide right now.

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Is AGCO Corp. Washed Out Enough To Own?

Seeking Alpha: My Fears About Titan Machinery Seem To Be Coming True

Titan Machinery (TITN) is showing why investors do well to be cautious about debt-fueled roll-up stories, particularly in cyclical markets where many of the major demand factors are out of anybody's control. As cash receipts for farmers are looking shakier and farmland values are starting to retreat, the outlook for ag equipment demand in 2014 is getting shakier. Unfortunately, Titan operates a model that requires merchandise to keep moving, as interest expense is nearly 10% of gross profits.

With another disappointment comes another downward revision and, I would assume, another round of price target cuts on the sell-side. While Titan had a lot of enthusiastic cheerleaders on the sell-side making "things aren't so bad" and "things will get better" calls not so long ago, sentiment has turned more negative. Even though I have a natural streak of contrariety that encourages me to swim against the tide, I'd be careful in approaching this name as an ag cycle that definitely outperformed to the up-side could very well also go lower than expected on the down-side.

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My Fears About Titan Machinery Seem To Be Coming True