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Mario Gabelli Loves CNH Industrial: Should You?
Barron’s recently highlighted 42 stocks that money managers were enthusiastic about for the second half of 2022 and beyond. One of the experts offering stock recommendations was legendary investor Mario Gabelli.
Gabelli offered eight stocks he likes right now. At the top of his list was CNH Industrial (CNHI), a London-based agricultural and construction equipment manufacturer. Gabelli believes the farm sector will experience healthy growth in the years ahead.
“The American farmer’s cash flow is estimated at $461 billion in 2022, from crops and livestock. Farmers will be buying more equipment. Deere is the leader in precision agriculture, with an estimated $22 per share in earnings for fiscal 2022 and a market cap of $93 billion,” Gabelli told Barron’s.
“CNH Industrial, [CNHI], which I am recommending, is catching up.”
I, too, like CNH Industrial. Here’s why.
CNHI Stock Is Cheap
According to Gabelli, CNH could earn $1.50 a share in 2023, which means it’s currently valued at 5.5x its 2023 earnings. Over the past five years, CNH’s average forward price-to-earnings multiple was almost 16x. From this perspective, there is no question that CNHI stock is cheap.
I tend to use a metric to evaluate whether a stock is cheap: free cash flow (FCF) yield, defined as FCF in the trailing 12 months divided by market cap. Through the 12 months ended March 31, CNHI had an FCF of $780 million. Based on a $16.1 billion market cap, CNH’s FCF yield is 4.8%. I consider a stock reasonably priced if it’s between 4% and 8%.
CNH reported its Q1 2022 results in early May. Its revenues were $4.65 billion, 15% higher over last year, excluding currency. On the bottom line, its adjusted net income was $378 million, a 7.7% increase over Q1 2021.
While its Agriculture segment accounts for 73% of the company’s overall revenue in the first quarter, its Construction segment increased revenues by 23%, excluding currency, to $803 million.
Until Dec. 31, 2021, the company’s business was segmented into On-Highway and Off-Highway businesses. The On-Highway segment -- light, medium, and heavy commercial trucks -- was spun off into its own publicly traded company, Iveco Group (IVCGF), which began trading as a separate company on Jan. 3, 2022.
It’s a Big Player in Global Agriculture
Except for Deere & Company (DE) and Kubota (KUBTY), CNH has the third-largest market cap of all publicly-traded companies within the agricultural and farm machinery industry.
CNH’s agriculture business sells its products through approximately 2,500 full-line dealers and 6,500 points of sale. Almost all of its dealers are independently owned and operated. Some of its dealers also sell CNH construction equipment.
In 2021, the company’s $14.7 billion in agriculture sales were divided as follows geographically: North America (35%), Europe (32%), South America (16%), and the Rest of the World (17%). All four of its geographic regions experienced strong sales in 2021.
Industry-wide, the sale of tractors and combines was very positive in 2021, with a 14% increase over 2020 and a 19% increase for the latter.
The big downside at the moment is the ongoing strike at two of its U.S. facilities in Racine, Wisconsin, and Burlington, Iowa. The plants have been on strike for more than two months. The more than 1,000 employees are looking for better pay and benefits. According to news reports, CNH employees haven’t struck since May 2004, almost two decades ago.
Things are so contentious that John Deere UAW employees from a plant in the Quad Cities picketed with their competitor’s employees. This could go on for a long time because both sides have high stakes.
The strike is a headwind to be concerned about.
The Third Reason to Own CNH Industrial
A couple of weeks ago, I suggested investors interested in investing in Stellantis (STLA) consider Exor NV (EXXRF), the automotive company’s largest shareholder.
As it happens, Exor also owns 26.9% of CNH’s equity and 42.5% of its voting rights. So, I think a good plan B is to buy Exor stock if you want to make a less-aggressive bet on CNH and the agricultural boom.
Further, Exor owns 27.1% of Iveco Group’s equity due to the spinoff and 42.5% of its voting rights. These are but three of the Agnelli family’s publicly traded holding company’s many investments.
But should you decide that CNHI is the way to go, it’s good to know that it’s controlled by patient money. Any decision to divest its interests won’t be taken lightly or conducted arbitrarily and irresponsibly.
Lastly, CNH Industrial is the combination of two great businesses: CNH Global, the Agnelli family’s holding company for its agriculture and construction business interests, and Fiat Industrial, the holding company created in 2011 to hold what is now Iveco Group.
The CNH in its name comes from the 1999 acquisition of Case by New Holland for $4.6 billion. Known as CNH Group NV at the time of its merger, it changed its name to CNH Industrial in 2012 when CNH Global merged with Fiat Industrial.
The rest, as they say, is history.
I’m with Mario Gabelli. CNHI is an excellent way to bet on the agriculture industry. So, too, is Exor. I encourage you to have a look at both.
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