Money Morning's oversold stock pick of the week is agricultural and construction equipment maker CNH Industrial (NYSE: CNHI).
Sometimes stocks get beaten down unfairly - but they're actually a great value. The share-price dip then gives investors an amazing entry point into a good long-term investment.
But Money Morning Chief Investment Strategist Keith Fitz-Gerald thinks CNHI stock stands to benefit from two "unstoppable trends," technology and demographics.
CNH Industrial: About the Company
CNH Industrial is a patchwork quilt of mostly European companies that builds agricultural and construction equipment, trucks, buses, commercial vehicles and industrial and marine powertrains. CNH Industrial has its headquarters in London, but is registered in the Netherlands. CNHI stock trades on the Italian stock exchange (Borsa Italiania) in addition to the New York Stock Exchange. This global conglomerate resulted from the 2012 merger between Fiat Industrial S.p.A and CNH Global. CNH Industrial was created through the 1999 merger of New Holland N.V. and Case Corp. The oldest of the 12 brands that now make up CNH Industrial is Case IH, founded in 1831. Other brands include Steyr, Iveco, and FPT Industrial. The company operates 62 plants worldwide and employs over 71,000 workers. CNHI Industrial has a market cap of $10.9 billion.
CNH Industrial Stock: Why It's Oversold
CNH Industrial's biggest business is agricultural equipment, where it is second only to Deere & Co. (NYSE: DE). The ag segment delivers 84% of the company's profits. Any turmoil in this market has an outsized impact on CNH Industrial. And that's just what happened. Prices for corn, wheat, and soybeans went into a slide last year. By September, grain prices were at four-year lows. So struggling farmers cut back on equipment purchases from companies like CNH Industrial. And as the outlook for ag equipment began to sink, so did CNHI stock. Since reaching a high of $11.84 in late April of last year, CNH Industrial stock is off 32% to just over $8 a share. The CNHI stock price has stabilized in recent months, but investors continue to stay away.
Here's why that's a mistake...
Why CNHI Stock Is a Buy
While grain prices remain low, the commodities cycle is due to reverse in 2015. And in the long term, population growth is a guaranteed stimulant of demand. That means sooner or later farmers will be coming back to CNHI Industrial for new equipment. When demand rises farmers will need better, more modern equipment optimized for higher productivity. Farming tech is like any other type of tech - it's always improving. And CNHI Industrial is right on top of this trend, with 42 R&D centers around the world. That's what Fitz-Gerald means when he says the company "sits at the nexus of technology and demographics." But in addition to the catalysts for CHNI's primary business, Fitz-Gerald noticed something in the company's recent Q4 earnings other analysts missed.
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"The company has been sharply reducing its merger-related debt. In Q4/2014 alone, the company whittled down its net debt by $1.2 billion - and it did this while devoting $1 billion to capital expenditures and paying out $400 million in dividends to shareholders over the year," Fitz-Gerald said. "In a year that was challenging for construction companies, those are very impressive feats - and a sign of very shrewd management."
The company plans to be net industrial debt free by the end of 2018.
And despite the tough year, CNHI invested $100 million in a manufacturing plant in China last July. This year the company plans to shore up its finances by reducing capital expenditures. In short, CNH Industrial has laid the groundwork not just to weather the current storm, but to thrive when the sun starts shining.
Investing in CNH Industrial Stock (NYSE: CNHI)
CNHI stock isn't likely to go much lower. So there's no need to wait if you're planning to buy. It's been trading between $7.36 and $8.36 since mid-September. On Friday, CNHI stock closed at $8.13. As its ag equipment business rebounds and its construction business grows, CNH Industrial stock should reach $10 within a year or so. And investors with a longer time horizon will see even bigger gains. While they wait, they can enjoy a 3.5% dividend yield.
"I expect CHNI to have a good 2015 and an even better long-term performance," Fitz-Gerald said. "After all, people have to eat, and they have to have a place to live."
Another Oversold Stock to Buy: Last time we looked at cloud-based video services provider Brightcove Inc. (Nasdaq: BCOV.) Brightcove is oversold because of lowered guidance last year. But this stock has some serious catalysts headed its way...
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About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.