CNH Industrial

CNH Industrial reported 3% growth in industrial activities to $4.1 billion and a 35% decline in EPS to $0.11 from $0.17 in the second quarter. Sales were more resilient than expected, and margins were affected by mix and tariffs.

Why it matters: The company tightened its 2026 guidance to the high end, expecting flat agriculture sales with margins between 5.0%-5.5%, 5%-10% growth in construction with margins from 1.8%-2.3%, and adjusted EPS of $0.41-$0.46. Investors were relieved and sent CNH shares up by double digits intraday. Ag sales were basically flat at $3.2 billion with 210 basis points of margin compression on mix and weaker volumes, especially in South America. The company continues under-producing retail demand in 2026 to further stabilize inventories. Performance was admirable given ongoing weak industry volumes. Despite a still-difficult backdrop, management went to great lengths on the call to describe improving industry indicators, including normalizing new and used inventories plus a tightening spread between new and used prices. Consistently stronger commodity prices remain the missing link.

Long view: Management confirmed that even with a flat industry in 2027, replacement demand alone will cause the company to increase production. The shape of the recovery will also be affected by farmer economics (commodity prices, input costs, subsidies, and so on). Having taken extensive cost actions this downturn and realizing positive price-cost, CNH’s ag segment should see clear growth and margin expansion going forward.

The bottom line: We are increasing our fair value estimate for narrow-moat Best Idea pick CNH Industrial to $21 per share from $20 mainly on the time value of money. The construction business is seeing improving sales, similar to peers, especially in North America. Margins remain weak due to tariffs but are poised to improve in 2027. Management reiterated that it is pursuing partnerships to support this business with greater scale.

Our $21.00 per-share fair value estimate equates to 41 times our depressed 2026 EPS estimate. Management’s 2026 guidance likely reflects a cyclical trough. The valuation is far less demanding based on CNH’s (prior peak) 2023 results, with implied price/earnings of just 13 times. Management contemplates even higher peak margins in future cycles, with their new midcycle target of 16%-17%. These multiples align with peak-to-trough levels over the past 10 years.

CNH faced significant headwinds across both business segments in fiscal 2024, declining over 20% in each. The company saw ongoing weakness in fiscal 2025 in agriculture, though dealer channel inventory is normalizing, and it continues to underproduce relative to demand. Competitors have provided similar guidance, and we think this could lead to the companies lapping easier comps in the second half of 2026. Currently, we anticipate flat performance in 2026, followed by a likely recovery in 2027 and beyond. For the core agriculture segment, we forecast approximately 15% average growth over the remainder of our five-year horizon, with margins expanding to an average of 16%. We believe the company is increasing its exposure to higher margins as it equips new machines with more precision solutions in addition to retrofitting its installed base. The trajectory of this forecast is modest in comparison with CNH’s recovery during past agriculture downturns. The margin expansion acknowledges that the company is successfully executing on its strategy to sell more technology per machine and may ultimately prove to be conservative, as precision agriculture technology is relatively early in its adoption in the marketplace. With further opportunities from launching autonomous and other electrified products, we believe the future opportunities are compelling, and the forecast is robust. Management is targeting a new midcycle margin of 16%-17%.

Our forecast for the construction segment is more conservative, though certainly achievable. Beyond the trough in fiscal 2025, we forecast an average growth rate of almost 10% and modest operating margin expansion alongside the cyclical recovery to a modest 5%. This business is clearly sub-scale, but there should be some operating leverage to a cyclical rebound. Management has already pursued a three-year restructuring to stabilize this business and acknowledges that where we are in the cycle can constrain upside. Management is evaluating various strategic alternatives for the business, ranging from a potential divestiture to various strategic partnerships to offload risk or otherwise enhance returns. We suspect acquisitions are highly unlikely for construction given how imperative it is for CNH to retain its investment-grade credit ratings for purposes of the finance subsidiary. It is understandable management would want to focus on the more straightforward value creation opportunities in the agriculture business and reduce the dilution construction brings to the portfolio.

Our Stage II forecast period incorporates an estimated investment rate of 16% and earnings before interest growth rate of 3% with perpetual growth of 3%. A 9.7% weighted average cost of capital derives from a market-average cost of equity and the firm’s current capital structure.

We assign CNH a narrow Morningstar Economic Moat Rating, underpinned by intangible assets and switching costs. CNH Industrial has a nearly 200-year history in the agriculture business. As a strong number-two player, many of the economic moat arguments are similar to its peers, though more muted due to CNH’s smaller scale. Intangible assets include its brands, dealer network, captive finance subsidiary, and technology. The Case and New Holland brands are very well known among farmers, with their bright red color in contrast to the green of Deere machines. Brand equity grows from offering a portfolio of high-quality, reliable products that boost farmers’ productivity. Farmers have used CNH equipment for generations, and there is a loyal installed base of customers. A robust dealer network means CNH’s customers receive first-rate support with timely availability of spare parts and repairs. This ensures customers maintain optimal uptime, particularly when growing seasons provide real-time constraints. With digital technologies and e-commerce, the dealer can offer even better predictive maintenance to ensure farm operations run smoothly. The captive finance subsidiary allows CNH to bundle financing with the other products and services and offer customers a one-stop shop experience. Owing to all these characteristics, a degree of pricing power is consistently evident in CNH’s returns in the agricultural segment, though it lags Deere. This is primarily a function of CNH’s inferior market share relative to Deere in the core North American market, the largest agricultural profit pool in the world. With a share of approximately 30% versus Deere's likely around 60%, CNH simply cannot command as much pricing power.

There are technological innovation and intellectual property considerations as farming equipment becomes more sophisticated. Like Deere, CNH is also at the forefront of development in precision agriculture, where various digital technologies are significantly enhancing crop yields and generating meaningful operational and cost efficiencies for farmers. Developments in drivetrain electrification and vehicle autonomy represent other tremendous areas of opportunity in growing the company’s addressable market. The role of technology highlights some meaningful points of departure between CNH and Deere that underscore CNH’s narrow moat status versus its larger rival. CNH’s strategy is more akin to that of a “fast follower” as opposed to being the cutting-edge technology leader in most cases. CNH has also been more acquisitive than Deere to gain precision agriculture technology, whereas Deere has developed more internally, which is part of why CNH cannot match Deere’s returns on invested capital. Nevertheless, CNH’s agriculture business seems to have ample intangible assets, as described above, to confer a narrow moat.

CNH’s mission-critical equipment and increased focus on its installed base through aftermarket and service offerings keep customers from switching. Rather than merely serving as a piece of equipment to complete a larger project, CNH’s agriculture products drive both increased customer revenue via higher crop yields and better profitability via more efficient operations. The company’s machines perform vital functions for farmers with very pronounced seasonal growing constraints. For customers, switching to an alternative product poses a significant risk to their operations (both top and bottom line), with the potential for disruptions from machine failures and/or long lead times to service equipment. The high cost of failure associated with switching away from CNH’s products increases the likelihood of missing valuable time to plant and harvest crops, ultimately cutting into a farmer’s profitability with high operating leverage. CNH’s service agreements give customers priority access to proprietary aftermarket parts and services from dealers, making it easy to understand the total cost of a machine over its operating life and enhancing the stickiness of the relationship.

Customers invest significant time and capital in machinery, creating additional friction when switching products. The purchase price of heavy machinery runs into the hundreds of thousands of dollars (and reaches the low-million-dollar range for the largest equipment, such as combines), in addition to the training time it takes operators to reach optimal productivity. The company’s parts distribution and extensive dealer network provide customers with aftermarket parts and reliable services to ensure their equipment will operate efficiently with minimal headache and cost of machine downtime, and without having to search for parts independently. The customer relationship in agriculture is far more consultative than in other types of construction machinery, which are ultimately more focused on moving dirt as efficiently and effectively as possible.

CNH’s construction business has no moat. The segment has lagged industry peers, Caterpillar, Deere, and Komatsu, and is estimated to be the global number five player in its key product categories of excavators, loaders, and graders, but a less impressive #18 in the broader category of earth-moving construction equipment. Management has been working on a three-year plan to improve margins here, focused on improving product quality and supply chain/sourcing. That said, there does not appear to be much incremental upside beyond some potential cyclical uplift. The business is constrained by its lack of scale, as evidenced by the clear performance gap versus its global peers (for example, the construction business doesn’t share agriculture’s dealer network). Management claims there is some manufacturing and product development synergy with the agriculture business (common components), though this seems grasping, as they don’t produce in the same facilities. CNH will likely need to pursue different industrial partnerships or even a sale of the business to realize much greater value.

CNH will keep up with technological developments in precision agriculture and narrow its performance gap versus Deere.

The company retrofits more of the machines in the installed base with margin accretive connected technology, structurally improving margins and reducing cyclicality.

2026 is likely the trough of the agriculture cycle and stronger revenue and earnings growth lie ahead.

The company loses share because it can’t keep up as the “fast follower.”

Management engages in value-destructive mergers and acquisitions.

Operating results follow the agriculture cycle and CNH’s performance erodes with the fate of its customers (the company is more of a conventional manufacturer versus technology-enabled solution provider).