DE - CNH Industrial: M&A At Full Speed

2023-03-31 10:34:00 ET

Summary

• Two acquisitions (and one financing round) to boost CNH Industrial N.V.'s competitive advantages.
• The company continues to grow in automation and values with delisting from Euronext (the Italian stock exchange).
• There are cautious forecasts for 2024, so we confirm our neutral target valuation for CNH Industrial N.V.

Here at the Lab, we are back to comment on the latest developments at CNH Industrial N.V. (CNHI). Our readers know that we usually provide a summary recap, today we suggest having a look at our initiation of coverage which also include the company's main risks.

M&A Optionality

CNH Industrial continues with its M&A acquisition strategy. Yesterday, the company announced its agreement to acquire Hemisphere GNSS, a global leader in high-performance satellite positioning technology, currently owned by Unistrong, a company incorporated in China. The company is the owner of Global Navigation Satellite System ((GNSS)) solutions, which provides pinpoint accuracy for the construction, mining, agricultural, and marine industries. The company will continue to operate as a standalone business thanks to its operations in Canada, the USA, and Australia. Hemisphere's network & expertise will be integrated into CNH Industrial's products & services. This combination will help provide customers with a superior user experience.

The deal is valued at approximately $175 million, net of cash and debt, and will be financed with available cash. The acquisition is expected to close in 2023 Q3 and is subject to certain conditions such as Unistrong shareholder approvals and the Chinese regulatory green light. This move, as CNH explains, represents a necessary "step in the development of our automated and autonomous solutions for the Agriculture and Construction segments. " The capabilities acquired will be integrated into the Raven brand " to guarantee full control of precision and navigation technologies. " This transaction valorized CNH Industrial's technology portfolio, explained Marc Kermisch, the company's chief digital & information.

Here at the Lab, we believe that Hemisphere's expertise will allow CNH customers to gain productivity. This month, CNH also announced the Augmenta acquisition for $110 million to accelerate its agriculture development with the Sense & Act technology. Thanks to this application, CNH will better collect data during the spraying process to improve crop protection. And again, through its Ventures arm, the company acquired a minority stake in U.S. agrotechnical company called EarthOptics. Proprietary sensing technology developed by EarthOptics accurately measures soil health and structure through a combination of ground-based sensors, satellites, physical soil sampling, self-learning models, and agronomic engineering.

By providing a wide range of soil data, this technology enables farmers to optimize management and increase land value. This funding, which is part of EarthOptics' Series B investment round, will help further the company's ability to develop its ultra-high-precision sensors to boost agricultural productivity and realize greater savings for its future clientele. In addition, it will allow the company to intensify collaboration with various service providers (agronomists, crop consultants, and other external consultants specialized in the sector) for data analysis.

Italian delisting

Last time, we already commented on CNH's decision to leave Piazza Affari (the Italian stock exchange). In detail, the company announced its intention to proceed with the delisting between the end of 2023 and the beginning of 2024. The tractor group will remain listed only in New York, and with Goldman Sachs's advice, the group is also evaluating how to harmonize and simplify the regulatory structure to facilitate the transition to the NYSE single listing. Looking at the CEO's comment, CNH " had the double listing for 10 years, but at the beginning of 2022 we demerged with the Iveco Group. "

Today, the stock liquidity is divided between two markets, and this makes no sense. CNH competitors are only listed in the U.S. and investors and funds need to have comparable metrics. CNH aims to achieve the liquidity and trading volumes necessary to enter the S&P 500. Wall Street's main index already includes the group's two main competitors: John Deere ( DE ) in agriculture and Caterpillar ( CAT ) in construction, which capitalize respectively $119 and $117 billion respectively. Competing on the same stock market ground could allow CNH to close the equity gap that risks turning into a competitive disadvantage when it comes to finding resources for investments or acquisitions.

Conclusion and Valuation

In the first year after the Iveco separation, the group closed with $23.6 billion in revenues (up by +20.8%) and a net profit of over $2 billion (with a plus 13.2% on a yearly basis). The stock is currently discounting CEO Scott Wine's cautious forecasts for 2024 and the delisting announcement (Italian investors might have sold CNH shares not to have exposure to the U.S. equity market). M&A optionality is a nice plus to consider (which we believe is already included in CNH's strategic plan and still needs to be approved by Unistrong shareholders) and at today's price, the company is trading with an 11x P/E ratio, and we are confident that CNH Industrial N.V.'s valuation is justified. Therefore, we confirm our equal weight target .

For further details see: