Ag Equipment Intelligence
CNH 1Q Earnings Easily Beats Street Forecast; Remains Conservative in its 2012 Outlook
CNH Global easily surpassed analysts’ estimates for its first-quarter earnings, which continues to reinforce the strength of agriculture fundamentals — particularly in North America.
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CNH, which is the parent company of both Case IH and New Holland ag machinery as well as their construction equipment branches, posted revenue growth of 22% in the first quarter. Growth for its farm equipment segment rose by 18% compared to the strong first quarter of 2011.
Nonetheless, the company issued a very conservative forecast that called for overall revenues to rise just 5% for the full year of 2012.
CNH reported earnings per share of $1.11, which was higher than analysts’ consensus of $0.74. Henry Kirn, machinery analyst for UBS Investment Research, had estimated an EPS of $0.71 for the quarter.
“The first-quarter beat vs. our estimates was driven by both better than expected revenues and operating margins (14% and 190bps above UBS estimates, respectively),” Kirn wrote in a note to investors. “Equipment revenues rose 22% year-over-year (+18% in Ag and +41% in Construction) to ~$4.6 billion (UBS estimate was $4.1 billion). Equipment operating margins improved ~230bp year-over-year to 8.8% (UBS estimate was 6.9%).
Kirn adds, “For 2012, CNH continues to expect revenues to increase ~5%, implying revenues of up to $19 billion (consensus and UBS estimates: $19.4 billion). Also, CNH sees 2012 operating margins ‘in excess of’ 8.6% (current UBS estimate: 8.6%). Given solid demand improvements and execution in the first quarter.”
Kirn said CNH would be questioned why it did not raise its guidance for the year based on its strong quarterly performance.
In an April 25 report by Reuters, William Blair analyst Lawrence De Maria said, "We view this as conservative and pretty typical for management to reiterate guidance during the first quarter."
He added he would not be surprised if CNH posted revenue growth of over 10% for the year.
1Q Over Production?
In her analysis of CNH’s first quarter earnings report, Ann Duignan of JP Morgan reported, “The company overproduced retail sales by 30% in the quarter, which helped absorption and investors should expect ‘choppy’ results in upcoming quarters as the businesses introduce new Tier 4i products and the market stabilizes after a pull-forward into the first quarter on favorable weather. That said, the second quarter should be better than the first.”
She also noted CNH’s push to improve its current credit rating. The keys to getting a credit rating upgrade include improved operating margins, capital business self-funding and diversity of funding. “Management noted that beyond more favorable funding costs, a credit upgrade would also help with relationships and access to capital markets,” Duignan says.
CNH 2012 Ag Industry Outlook
| Agricultural Equipment Industry Volume Outlook | 2012 Outlook | 2012 Outlook |
| Category/Region | From Q4'11 | From Q1'12 |
| Total Worldwide Ag Equipment | Flat to +5% | Flat to +5% |
| Tractors-Worldwide | Flat to +5% | Flat to +5% |
| North America | Flat | Flat to +5% |
| Under 40HP | Flat | Flat |
| Over 40HP | Flat to +5% | Flat to +5% |
| Europe, Africa and the Middle East & CIS | Flat | Flat |
| Latin America | – 5% to -10% | – 5% |
| APAC (Asia Pacific) |
+5% | Flat to +5% |
| Combines-Worldwide | Flat to +5% | Flat to +5% |
| North America | +5% to +10% | Flat |
| EAME & CIS | Flat to +5% | +10% |
| Latin America |
–5% to -10% | Flat to -5% |
| APAC | Flat to +5% | Flat to -5% |
Source: Company reports & JP Morgan