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CNH Posts Fantastic Quarter, Outlook for Equipment Strong

publication date: Jul 25, 2011
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author/source: Valuentum Analysts

CNH Global (CNH), the second-largest maker of farm equipment after Deere (DE), posted fantastic second-quarter results Monday, with net sales increasing 24% and net income more than doubling. The firm experienced substantial strength in agricultural equipment and construction equipment revenue, up 22% and 30%, respectively, and translated this performance into solid profitability improvement. CNH’s operating margin increased to 10.7% during the quarter from 8.4% in the same period a year ago. We were quite pleased with CNH’s performance and have added it to our watch list, a component of our Best Ideas Newsletter.

CNH expects demand for agricultural and construction equipment to remain firm through the remainder of 2011, noting strengthened conditions for commodity prices and, by extension, improving farming income. Specifically, the company estimates that worldwide unit agricultural equipment demand will increase 5% to 10% this year, while construction equipment demand could be up as much as 30% in 2011. CNH’s global tractor sales grew 13% in the quarter, while global combine sales jumped 17%. Regarding its construction equipment, North American demand was up 37%, while the EAME & CIS markets jumped 33%. Both agriculture and construction demand in the second quarter were outpacing management’s forecast for full-year growth rates, and as a result, we would not be surprised to see continued fundamental outperformance in the quarters ahead.

On the heels of this strong second-quarter performance, the company now expects full-year revenue growth to be 15% to 20% (was 10%) and its operating margin to reach nearly 8% for the year (7.9% on the high end), both measures we think are readily achievable. We think CNH’s shares could represent a compelling opportunity and would not hesitate to initiate a position in our Best Ideas portfolio should it become more attractive than existing long holdings.


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