Breakingviews: CNH can release valuation brakes with truck split

Compared to trucks, tractors look sexy. That observation helps explain why CNH Industrial, the $14 billion Italian-American group backed by Turin’s billionaire Agnelli family, may spin off its struggling Iveco commercial vehicles unit.

CNH’s vans and heavy goods vehicles are likely to deliver more than a third of the group’s $29 billion revenue this year. But they contribute far less to the group’s overall value, thanks to a measly 3% operating profit margin and dismal sales outlook. Revenue are expected to contract 1% this year and another 3.6% next, according to Refinitiv forecasts.

Iveco is a relatively weak brand in the highly competitive European goods-vehicle market. It has lured customers by guaranteeing to repurchase vehicles after three years at a generous price. These deals are expensive. Stephens analysts estimate a drain of $625 million of cashflow last year, more than twice the $299 million of operating profit.

Investors seem happy to see the back of CNH’s vans – hence Friday’s 4% share price rise. They’re not salivating over Iveco’s prospects, but a freestanding group would benefit from more determined management. Alternatively, it could end up adding to a rival’s scale in the consolidating global van and truck market.

What is more appealing is the largely agricultural company that would be left after a spinoff. CNH’s Case and New Holland farm machinery brands could have some hidden value.

Start with the current CNH enterprise value of $29.5 billion, 10.5 times this year’s forecast EBITDA. That is a discount to more profitable farm rival John Deere’s nearly 17 times. A truck-less CNH might support a higher multiple, say 14 times EBITDA. If it retained all the group’s $15.5 billion net debt, the equity market capitalisation would be $11.5 billion, according to a Breakingviews calculation.

Then give Iveco a conservative enterprise multiple of 3 times 2018 EBITDA – half that of 11 billion euro German truck maker Traton. That translates to an equity value of $2.7 billion.

With these conservative valuations, the two-part CNH is worth only 1% more than CNH’s valuation after Friday’s bump. But the divided group might gain more traction for moving to sunnier pastures.

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