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CNH Industrial (CNH +4%) farms healthy gains today, reaching its best levels since May, following an upgrade to "Outperform" from "Mkt Perform" at Raymond James.

Briefing.com notes that the agriculture industry has faced a few setbacks over the past year, producing tepid yields for CNH, which recently delivered its widest yr/yr revenue contraction since mid-2022. However, while headwinds are still generating uneasiness within the ag industry while new construction activity remains shaky, CNH may have already endured a bottom.

• What does CNH do? Since spinning off its commercial vehicles and powertrain business in 2022, CNH has focused on manufacturing agricultural and construction equipment. Its brands directly compete with Deere (DE), AGCO (AGCO), Caterpillar (CAT), and various privately held and overseas companies. In agriculture, CNH's brands are known for their similar quality to Deere, creating meaningful brand loyalty. The same can be said for CNH's construction banners. However, ag remains its core business, comprising over 80% of industrial activity revs in FY23.
• The ag industry is dealing with a downcycle. However, CNH shored up structural costs, production cadence, and sourcing to prepare for this. The company's cost reduction program is aggressive, eyeing $550 mln in savings this year. Even though CNH has had to trim its FY24 EPS outlook twice thus far, its bottom line has held up decently, given how weak its top-line performances have been this year, contracting by 16.4% yr/yr in Q2 and 9.8% in Q1.
  • Cost savings will remain CNH's focus throughout the current cycle. Management has expressed confidence in sustaining margin improvements despite industry demand compression. This focus should provide a sturdy foundation once demand rebounds.
• When demand bounces back remains unclear. However, CNH was upbeat about farmer balance sheets in July, which remain in good shape despite incomes tracking below the 20-year average. Meanwhile, equipment is aging, and new equipment dramatically improves yields, offsetting the steeper costs. Even though CNH believes that the industry could remain flattish for a while, it does not anticipate a significant step-down, such as what transpired 15 years ago.
  • Deere talked about similar dynamics last month. A possible significant catalyst could be replacement demand, which may begin boosting sales sooner rather than later as interest rates ease. New equipment has tangible benefits, such as producing greater yields and increasing efficiency. Also, while incomes are stagnant, farmland values continue to rise, keeping farmers' financials relatively sound.

Skies may be far from sunny for CNH and the broader ag industry. However, clouds are not darkening, and with interest rates coming down, some may be beginning to retreat. In the interim, CNH's cost-saving initiatives should maintain its profitability. Furthermore, by right-sizing dealer inventories, less used inventory will be on lots, helping eventually nudge consumers toward new equipment.