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Will CNH Industrial's 'Transform 2 Win' Plan Pare Woes?

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CNH Industrial (CNHI - Free Report) , which offers vehicles for agricultural and industrial purposes, has been grapping with sectoral challenges. During 2019, the company’s revenues declined in each of its segments — agriculture, construction, powertrain and commercial/specialty vehicles. Lower sales volume due to sluggish industry demand and dealer inventory reduction actions impacted results of the under-the-radar truck maker. High leverage of more than 80% is a cause of worry. Muted outlook for 2020 is further weighing on the firm’s stock performance. Notably, shares of this Zacks Rank #3 (Hold) firm have declined 15.5% on a year-to-date basis, wider than the industry’s 5.3% decline.

Bleak View & Cost Headwinds Play Spoilsports

Headwinds surrounding agriculture and construction sectors are likely to take a toll on CNH Industrial in 2020. The company expects decline in its agriculture and construction segments, particularly in the first half of the year. The company expects adjusted EPS to decline 40-50% in first-quarter 2020.

As agricultural equipment is the largest contributor to net Industrial sales, dismal business is a concern. After-effects of unfavorable weather and trade uncertainty will play spoilsports in this regard. Although Phase 1 of the trade deal between the United States and China has been signed, the details and pass-through adoption caused uncertainty among producers. Weak commodity prices are likely to hurt results from CNH industrial’s agricultural end markets during this year.

Unfavorable volume and mix in North America and Rest-of-World markets, along with high costs of raw materials are likely to dent the construction segment’s results. Softening market demand in the Truck business, particularly in medium and heavy industries in Europe, is likely to mar the firm’s results. 

For full-year 2020, CNH Industrial envisions industrial activities’ net sales to remain flat to slightly down compared with 2019. The adjusted EPS guidance has been kept between 78 cents and 86 cents, indicating a 2% year-over-year fall from the midpoint of the guidance.

CNH Industrial — through its four segments — has a global presence, making it vulnerable to foreign exchange volatility. Rising capital expenditure is also a concern for CNH Industrial. This is resulting from rising investments to develop products and technologies, which include funding for precision farming platform and the launch of Stage V emission requirement compliant engine applications. Further, investments for capacity expansion, high material costs, overhead expenses and tariff headwinds add to the company’s expenses, which may hamper profits. 

Strategic Endeavors to Bolster Long-Term Prospects

The firm’s five-year 2020-2024 business plan Transform 2 Win strategic plan bodes well. Per the plan, the company aims at operational efficiency through targeted restructuring efforts in order to enhance profits and streamline business. It expects full implementation of the plan by the end of 2022. As part of its five-year plan, the company plans to spin-off its truckmaker Iveco as a separate business to double the profit margin. The strategic spin-off holds the promise of unlocking significant value by maximizing focus, optimizing costs and delivering synergies.

It is developing several products and technologies across all segments to remain on par with the latest technological advancements and emission-control procedures. Upgraded product offerings will aid the company in achieving new business contracts. CNH Industrial is working on a business plan to combat approaching megatrends that are affecting the industry, which includes digitalization, electrification and automation. CNH Industrial collaborated with NIKOLA to transform Class 8 heavy-duty trucks into emission-neutral ones in North America and Europe through the adoption of fuel-cell technology. The development of battery electric NIKOLA TRE will help CNH Industrial gain market share as a first mover in the electrification of heavy trucks.

The company regularly acquires and divests dealerships and franchises to expand business. Last year, CNH Industrial completed the acquisition of ATI Inc., which will provide access to factory-fit industry-leading track technology to customers of Case IH and New Holland Agriculture. It also acquired K-Line Ag to enhance the crop-production portfolios of Case IH and New Holland Agriculture. The firm sold the Truckline parts business to Bapcor this year, in order to ensure continuity of service for Australia’s commercial vehicle customers. CNH Industrial aims at operational efficiency through targeted restructuring efforts in order to boost profit and streamline business.

To Sum Up

Indeed, CNH Industrial is battling with sector pressures, high expenses and a stretched balance sheet. Dull outlook for this year also dampened investors’ confidence. Nonetheless, the company’s restructuring efforts to transform its portfolio, improve margins and make targeted investments in technologies will enable it to stay afloat despite headwinds. The strategic roadmap will enable the firm to boost sales and earnings in the long term.

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