Tractor Talk With CNH CEO Scott Wine

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So between now and January 2nd, all of our shares that are held by European funds have to sell. So we've got Unfortunately, a lot of sellers coming into the market is these companies aren't allowed to hold US companies anymore.

Hello and welcome to the Barron Streetwise Podcast. I'm Jack Howe, and the voice you just heard, that's Scott Wine. He's the CEO of CNH Industrial. We talked about it quickly here a couple of weeks ago. They make tractors and all kinds of big farm machines. Scott's going to talk about his strategy for growth and why he thinks his stock price is depressed. And speaking of low stock prices, we'll also take a quick look at the cheapest stocks in the S&P 500 index. Listening in is our audio producer Meta. Hi Meta.

Hi Jack.

I have not yet talked about, uh, on this podcast, the cheapest stock in the S&P 500, right? I wrote something about it in Barron's, but we haven't spoken about it. Am I right about that?

Yeah.

Okay. I'm gonna run down the 5 cheapest stocks in the S&P 500. Folks out there, you can guess in your head what you think they are. They will get cheaper as I go along. This is not like a buy list. This is not— I'm not saying, hey, these stocks are cheap, grab them. I'm just— this is neither here nor there. I'm just pointing this out in case you're interested. Number 5 is a company called NRG Energy, and that's a Texas utility. And that company spent $2.8 billion to buy something called Vivint. Vivint is— it's a maker of like home security equipment, control gadgets. Like if you have ADT at your house, then you can get the alarm and you can get the doorbell cameras and all sorts of things. And you can do that with Ring. There are a bunch of different brands. And so Vivint is one of these brands. This utility spent a lot of money on it. Some investors aren't happy. There's an activist investor who says it wasn't a great idea. And yeah, that stock is cheap. That's under 6 times earnings. Also under 6 times earnings and number 4 on the list is Synchrony Financial. That does a lot of store credit cards. Maybe it was last week we spoke about how delinquency rates are on the rise for credit cards. And so Wall Street is kind of watching to see whether those rising delinquency rates turn into defaults and whether that might hurt some of these credit card companies. Number 3, now we're below 5 times earnings. United Airlines trades at 4.7 times forward earnings projections, and that is because, well, legacy airlines have traded cheaply for a long time. That's a difficult business, but also airfares have fallen pretty significantly. Flights for the holidays, flights for around Thanksgiving and for Christmas time coming up, Those prices are down, let's say, anywhere from 10 to 25% from a year ago. It kind of depends on which dates you're looking at and which source you're checking with, but prices have fallen off pretty quickly. Volumes are okay, but still, that's a difficult situation for airlines right now, and some of their shares have fallen off. Okay, so number 2 is General Motors, another company whose shares have been cheap for a long time. This is, I guess, a double whammy. Maybe it's part of the same whammy. I don't know. Count the whammies here. The car business is difficult enough to begin with, right? But several years ago, Tesla shares were running up and legacy carmakers were going nowhere, and investors said you have to get into electric vehicles. That's what everyone wants. All these companies need to have robust electric vehicle programs and autonomous vehicle programs and all these sort of futuristic things. And companies including GM put a lot of money into that. GM has a program called Cruise, and I'm looking at a headline headline on the website The Verge, and it says GM's big bet on driverless cars turns sour. There was an accident back in October. The CEO has resigned. The company needs to think about whether it wants to continue to put billions of dollars into that sort of research. And at the same time, we recently got Berkshire Hathaway's quarterly securities filing where you can see what it has bought and sold. And you see that it's sold out of its remaining GM shares. Warren Buffett has said that his favorite holding period for stocks is forever, but for GM it turned out to be about 11 years. And the fact that he's selling a stock trading at 4.5 times earnings tells you a cheap price maybe isn't enough on its own. You need some kind of catalyst to get things going in a better direction. And also, maybe don't hold on to value stocks forever hoping they'll come around. Okay, the single cheapest stock in the S&P 500 trading at about— it was recently 3.3 times earnings, about 3.4 times now. It's called Viatris. Heard of it, Meta?

Nope.

No, and you're not alone. I bet you there's loads of people who've never heard of Viatris. They're saying the S&P 500 index is supposed to be the biggest companies, uh, why is this company that I've never heard of in this index? Um, it's because the name is fairly new. There used to be a drugmaker called Mylan. Mylan was a quite— I'll say controversial company. Controversial is probably a kind word. In some circles, it was a— is reviled too strong? Maybe not. Mylan was best known for buying this adrenaline autoinjector, these, these pens called EpiPen. And this is a life-saving treatment for someone who was having a severe allergic reaction, including children. And it bought these things and it raised the price of a 2-pack of these from $100 to $600 in less than a decade. This is a medicine that had been around for close to half a century. So this seemed like a classic example of, uh, what's the word I'm looking for here, Meta?

Greed?

Yes, that's it. That's a good way to— that's a good way to describe it. Although the, you know, the CEO of the company got brought in before Congress to explain this. And, you know, she said that some of the price increases were related to product developments, but there was a lawsuit and an email uncovered where she had communicated directly with the CEO of Pfizer. Pfizer was a manufacturing partner for this product. And the subject of the email was about Pfizer killing its competing product. They had something called Adrenoclick, and it was about Mylan CEO wanting to prod Pfizer to take this off the market so that there would be just this EpiPen on the market. And that was a subject to litigation. Both companies later settled lawsuits related to EpiPen, paid hundreds of millions of dollars each without admitting wrongdoing. So that's Mylan. I think investors really soured on that stock. I mean, the stocks went into free fall after the CEO appeared before Congress, which was in 2016.. And so Mylan really needed, I guess, like a new identity. It needed a new everything because investors just weren't having it. So early in the pandemic, they combined with this unit of Pfizer called Upjohn. Upjohn has like medicines that used to be big blockbuster sellers. They have recognizable brand names like Celebrex and Viagra and Lyrica, but now they face generic competition. So they're no longer the, growth business they used to be. It's kind of like a portfolio of drugs that you're trying to manage for cash flow. So it was a merger of these two businesses that can generate a lot of cash, but one of them was boring and the other one was hated. And the company got a new name and the new name is Viatris. And the former CEO of Mylan stepped down and some other people at the company took over. So there's new-ish management. And so the new company introduced a big dividend. The stock now has a dividend yield of over 5%, but the share price kept falling after the dividend and management came out with a new plan about what they're gonna do to turn things around. It involves some asset sales that are gonna raise a good chunk of money. One of the things the company's gonna sell is what's called its biosimilars operation. Maddie, you think everyone knows what a biosimilar is? I don't. Like if you have a drug that's made using chemistry, then you can make an exact copy of that drug. You can do the same thing and you call that a generic once the drug goes off patent, you have a generic, it's identical. But when you have drugs that are made using biology, you make a drug that acts in the same way, and they call it a biosimilar. So think of biosimilar as a generic for a biological drug. Somewhere out there right now is a drug researcher in a lab coat that's just cringing at my, at my ham-fisted explanation of what he or she does for a living. I'm sorry. Anyhow, Viatris is selling its biosimilars operation. You would think that that's like a sort of newer business that ought to be a growth business you should be in. But what has happened is there are loads of biological drugs that are going to come off patent in the several years ahead. It's something like a $70 billion revenue opportunity, but absolutely everyone is going after it. Big, you know, heavyweights like Teva, are in this business. So you have a best-selling drug like that, um, Humira for arthritis, that, you know, finally loses patent exclusivity after decades, and there's 7 competing programs to come up with a biosimilar for it. So it's very competitive. It's expensive to make those drugs, and Viatris figured, let's just sell this, take the cash, and see what else we can do. It has bought a couple of companies that make eye treatments, and it's developing some drugs in-house. But I guess my point here is that it hasn't really convinced investors yet about its ability to grow. Investors see good cash flow, but also a lot of debt, and they see a portfolio of drugs that are going to, you know, be managed into the future, maybe gradually decline in sales, and they don't yet see what's going to offset that. So it's a turnaround candidate without yet a convincing turnaround plan. And I know some people are going to be saying, all right, I mean, just tell me whether I should buy it or not. Are you saying to buy it? Are you saying don't buy it? I don't know. I'm not saying either one. I'm definitely not saying buy it. The way Berkshire sold out of its GM, as I said, speaks to you have to have something more than a cheap price. You have to have something more than potential. You need to have a plan. Jefferies, for example, upgraded Viatris to buy early this year. They said the stock's cheap. We think that the you know, management is gonna have a plan to get back to growth here. And they said, um, they predicted 29% upside, they got 20% more downside. So it's hard trying to call the bottom for a stock like this. Anyhow, those are the 5 cheapest stocks in the S&P 500 if we're going by forward price-to-earnings ratio. Matter of fact, was that whole thing interesting to anyone for any reason, or was I just rambling about a bunch of stocks here? It's hard to tell sometimes. What do you think?

I found it interesting.

Well, then I got one. If there's no one else, at least I've got you. Thank you. I think it's time to talk about tractors. So we should transition from cheap stocks to tractors. I'm not much of a segue guy. I like to stop talking about one thing and start talking about another thing. But in this case, I guess we could point out that CNH Industrial is a mighty cheap stock. It's not a member of the S&P 500.

Is it a mid-cap or a small cap?

It is, I guess you could call it a mid-cap. It's about a $13 billion market cap, which is small for a company that has this kind of market position. I think they show the stock at 11 times this year's projected free cash flow with some pretty good growth expected for free cash flow in the years ahead. So definitely a value-priced stock. This is a business that's in transition because it is now trading on its own. In the past, it's been combined with a bunch of other businesses, but now it's kind of pure play agricultural machinery. And so it's maybe better able to go up against the likes of Deere and AGCO and able to invest in technology and so forth. And I wanted to learn more about this transition and the company's plan for the years ahead. So I spoke with the CEO, Scott Wine, and we started off with Scott's background. I don't mean where he came from or what he did before this, although we got to that. I mean, what was behind him while we were speaking on a video call? I see 3 pictures behind you. These are big machines. What am I looking at?

Well, right behind me is a Case IH, which is one of our big agriculture brands tractor. It's a workhorse, if you will, of cash crop. We talk about agriculture, there's 2 main businesses, there's cash crop, and there's hay and forage. And that's a good cash crop tractor there. On the left is a wheel loader, a real heavy working machine. And then over my right shoulder, you'll see a combine. And, you know, we're a market leader in combine. We just came back from Agritechnica, the largest agriculture show in the world, is in Hannover, Germany. And they gave away one gold medal this time. It was for our combine, which is the replacement for the product you see there.

I see. I was trying to talk combines yesterday, and I was not doing a very good job because I don't, I don't know as much as I should. I was out in Amish country in Pennsylvania, which I was seeing a lot of New Holland gear. A lot of dealers out there with New Holland brands selling some used machines and whatnot. But we were passing some farms. I was explaining to my daughter, well, a combine is called a combine because it combines 3 things. And I couldn't remember how it takes the corn off the stalk and it just turns it to grain right there in the machine.

You just described it. There's about a million additional things that are happening before that happens, but that's the end result.

That's nuts, by the way. That's— forget about artificial intelligence, what have you. That's nuts that you take corn off a plant, you turn it into kernels right there in the machine before you even bring it over to the, the granary.

Yeah, it really is amazing technology. And, you know, we've been at it for a long time. The buzzword today is artificial intelligence, and there's really a tremendous amount of artificial intelligence that goes into making decisions. You know, I'm sure we're at some point today we're going to get into talking to you the difference between autonomy, which, you know, you deal with that with cars all the time where there's not a driver, but automation where we actually use AI to do things that a farmer would otherwise have to do to make the machine much more productive and efficient.

Well, I want to get into it. There'll be people hearing this, by the way, they're going to say, does Jack think that combine harvesters are new? No, I know they've been around for a long time. I'm just still very impressed by them is all. So the company is CNH And the letters come from Case and New Holland, which my understanding is those are originally American brands from Wisconsin and Pennsylvania. And then now the company has ended up associated with Fiat in Italy. And now you're back trading on your own. My sense of the company is that everybody around here knows Deere and people know AGCO. And your company is a huge company that might not— even though these are American brands, they might not have the American investor recognition because it's been in Europe for a while. Am I off base there? Is there— you're going to have this listing now just in the US. What's the plan?

You're not exactly off base, but what you just articulated is one of the challenges. I will admit it is a complicated story and I've been with the company just— it'll be 3 years at the end of the year. And the lion's share of my work is trying to simplify the company in almost everything we do. And, you know, one of the parts of simplification is the single listing. And you're right, Fiat bought Ford Tractor, which was New Holland, and that ultimately merged with Case IH and became Case New Holland. That was a wholly owned subsidiary of Fiat, but dual listed in Milan. And in the New York Stock Exchange because we never gave up the listing here. And over time, we've always maintained a big, big presence. The US is still our largest market. Europe's, uh, just right behind it. And in 2013, Fiat merged the Iveco heavy truck business. If you go to Europe, you'll see Iveco trucks everywhere. And they had a truck business and an engine business. And then last 2020, The beginning of 2022, we spun that business off. So Iveco Group is a separately listed company. That was part of our simplification. And then a next step of our simplification is to go from a dual listing on both the Milan exchange, Italian Bourse, if you will, and the New York Stock Exchange. And we will complete that January 2nd will be our first day as a single listed company on the New York Stock Exchange.

We're just talking about the stock listing. There's nothing in the company that's moving. You don't have longer-term designs to become a U.S. company or—

No, we're actually— again, I'm feeding into the narrative that it's somewhat of a complicated story. Our largest shareholder is Exor, the Agnelli family out of Italy. But we are incorporated in the Netherlands. We're tax domiciled in the UK, but we will be solely listed on the New York Stock Exchange.

Let me jump in here for a moment for the old throw to the break. Right, Meta? Time to break time. Yeah, we'll be back in just a minute.

Data is everywhere. When orchestrated properly, it sings. At Morningstar, we analyze and enrich data, making it actionable and powerful for you. Morningstar, where data speaks.

Welcome back. We're talking about big farm machines with CNH Industrial CEO Scott Wine. How's the farm business right now? Like an American, I think about US farmers, but you've got to think all around the world. Give me the global snapshot. How's the farm business? How are crop prices? How are farmer incomes?

Well, farmer incomes are coming off 2 years of record income. The good news is farmers still have a lot of money. Downside is soft commodity prices, grains, corn, those prices are coming down. We had a record harvest for corn. I mean, you, you heard everybody, the news talking about the severe drought, the worst ever, and we end up having a record crop for corn here in the US. But I don't know, you probably saw the news over the course of this summer. Brazil took over the United States as the largest exporter of corn in the world. So Brazil is a huge market for us. Unfortunately, that That's a very slow market right now. So we're having to deal with that. The Brazilian farmers are waiting for higher grain prices. And so they're just storing their grains and waiting for higher prices. I don't believe that's going to work out extremely well for them. But we're standing by to sell them equipment when they ultimately sell it. But farmer incomes are down. We are projecting that 2024, that our sales are likely to be down somewhat slightly because of that. We announced that on our most recent earnings call. But overall, even though it's down, still going to be at historically high levels for agriculture in general.

You know, we're talking about farmers here. Some of these folks are not folks with endless capital resources. They've got to wait for those higher prices just to get the cash flow going so that they can purchase new equipment. Is that the case? Or how do they tend to plan that sort of thing?

That is how most of them tend to plan it. Believe it or not, one of the most motivating factors for farmers to procure equipment is to avoid paying taxes. So, you know, they're buying at the end of the day, they want to offset some of that income with a purchase. And that has worked out well for us over the last couple of years. So we're seeing it slow down. But by no means is this a sharp downturn in the agriculture market.

So when incomes are up, then you've got something you're looking to offset. Now you're going out and buying a piece of equipment to offset it.

That's exactly right. And many of our biggest customers, they'll buy 20, 40, 60, 80 pieces of equipment every year, every second year, and then trade those in. I mean, a combine can cost you $1 million. They're not laying out $1 million for the combine. They're laying out the $200,000 difference between the new one and the trade-in. That's how the math works a lot of times.

Let's talk about where we are on the technology curve and what's driving purchases aside from just, you know, you need new machines? What are the features that farmers tell you that they're most excited about, the ones that are, if they're on the fence about buying a new piece of equipment, this is something that's going to make them buy?

We call it precision agriculture. And that's been around for 30 years. But it's just the next level of precision agriculture. I mean, today, I would say the vast majority of our, what I again call cash crop farmers, you know, they get in a tractor or a combine, and they're not spending much time actually operating the machine. It does operate itself because, you know, really down to the centimeter level, they're providing accuracy of first planting, and then spraying, and then fertilizing, and then ultimately harvesting. So just making sure you're going over that field and having the ability to go exactly where you wanna be. So you think about sustainability's relatively new for most of the population, but farmers have been dealing with sustainable practices so they can get better yields. And ultimately for me, everything we do is about productivity and yield. If we can help a farmer get a little bit more from that acreage of corny plants, and precision agriculture gives you ability to do that. You know, when I was 4 months into the job and I had to go talk to the board about spending $2 billion to acquire Raven Industries, a company in Sioux Falls, South Dakota. And that really is where we went from buying most of the precision equipment from a company called Trimble, which you might know, great company. So we were buying most of our precision solutions from Trimble, and then we bought Raven to allow us to start doing most of it in-house. And we're in the middle of that transition now, and it's very rewarding for us and, and for our customers.

Last group of farmers that I visited with, everybody's staring at their screens just like the rest of us. They got their satellite imagery on their phone and they got their new tablets. You know, they were just as excited to show off a new tablet as to show off a new, you know, machine out in the barn. So you can see the spread of technology. What does that do for you, being able to bring that in-house? What do you expect to get out of that?

Well, I mean, mostly it's the ability to serve our customers better. We can then, because we're doing it in-house, we can react faster, we can listen to what they need. You think about what Apple's done so well is made everything intuitive. And it's that intuitive design, the farmer doesn't have to remember which of the 6 screens that he needs to go to to get something done. The system leads him through that progression. And, you know, those are the types of things we can do. And it's really allowing a farmer to get in the tractor and see a screen, or be sitting in his living room and see that exact same screen. So he can yell at his son for, you know, almost being able to run out of gas or predict when they need to replace a filter. All of those things, just making life easier and better for farmers.

How do you stack up against the competition? Deere, AGCO, what would you describe as your competitive advantages looking forward?

When I started here, I spent a lot of time talking to employees and talking to farmers and our construction customers, and the most frequent thing I heard was CNH makes great iron. And what they mean by that is just the equipment itself is almost second to none. Call it horsepower to the ground, if you will, for tractors or the efficiency of a combine, how it all works. We're really, really good at that. But in the same sentence or the next sentence, they would say, but we really want you to up your game on technology. And I would tell you that John Deere's done a really good job of consistently developing their tech stack and they've provided a better in-house solution to their customers than we've been able to do. But that's what Raven did for us. It just enabled us to close that gap very, very quickly. Now we've still got another 18 months of work to do, but we're very, very far down the road of providing great solutions, including autonomous— not automation, but autonomous tractors where you actually won't need an operator in there. And, you know, we're going to sell our first autonomous tillage unit next year where, you know, a farmer can literally just send the tractor on its way and have his field tilled.

People have gotten used to being skeptical about the cars on the road, the robo cars driving themselves. But I always mention, like, the farm is not an if or not a when. Like, it's already starting to happen because obviously you're not dealing with pedestrians out in the farm. I would think that it's further ahead there than it is on, like, highway driving.

Well, we don't need Level 5, and you're describing the challenges of Level 5 in automotive, but, you know, we don't need that. But we do need Level 4, and we've got to have all of the safety factors. You don't want to kill the family dog on the farm, or probably they want to kick that combine or tractor off very quickly if you did that. So, you know, we're going to ensure we have all of the safety mechanisms, but we've largely done that. It's just making sure we get all through the use cases. But we're going to start selling autonomous vehicles to farmers in 2025 and just build on that portfolio over time.

What do you do for the software? Do you have to— did this company give you software engineers? Do you have to hire a lot of software engineers? Do you outsource some of that or is that all in-house, your software?

Raven gave us quite a bit of it and then we've added several hundred software engineers to that. So it's interesting. I've been in business, this is my, I guess, 15th year as a CEO and I'm really comfortable yelling and encouraging my engineers to go faster. I don't have that same effectiveness with software engineers because I don't really understand what they're doing. I know what the value that they're bringing, but we've got a really good team, really, really good team working on this. And I do get to see the result of their work quite regularly. And I'm really encouraged by what we're pulling together here.

So for an investor who wants to understand the growth strategy, is the growth strategy just, hey, people already want our machines, there is pent-up demand for some of the new technology that our rivals have been rolling out. And we're going to build that technology out and layer that onto our machines. Is that the growth plan? Are there more parts to it? How do you grow from here?

I think the growth story is quite easy. I'm going to go back to kind of how I started, talked about Agritechnica, this big agriculture show in Hanover, Germany. It's a CR11. It's the new combine that'll come out in 2025, and it is 10 to 20% better than anything that's ever been introduced before.

How so?

Because it It actually runs faster, which means more productive, and has higher throughput. So you get much more capacity, and the farmer, he's going to get a noticeable improvement in productivity and yield off of his farm. And that means that people are going to buy more of that. So we've been able to do that type of thing for some time, and we're going to marry that now because of Raven, a company we recently acquired called Hemisphere, which makes the GNSS or the, the navigation solutions. We have all of that in-house now. So we're going to marry this industry award-winning product with great technology, and we think it's a winning recipe for us. We've also made tremendous progress with our margins. We've doubled the margins of our construction business, and we've got record margins in, in both construction and in agriculture this year. So we feel like that we're bringing customers what they want, but also giving shareholders what they want with a simplified story and better financial performance.

You're no longer the new guy. You came in in 2021 and you came from Polaris.

Yep, 12 years and 4 months there. Market leader in off-road vehicles and, you know, the American Indian motorcycles. Interestingly, the success at Polaris was products, brands, and distribution. And for CNH, we've got to be great at products, brand, and distribution. It's just a much more global scale. And a more industrial or, you know, work product instead of a recreational product. But otherwise, the business model is very similar.

And I take it that forgetting about the current ag cycle, that you find the long-term prospects for the business encouraging. When you think about the next 5 to 10 years in your business, what are you looking at?

Well, I mean, what I'm most excited about, you know, you started describing some of the complexity of the company, and we have made tremendous progress towards making the story simpler. But what people don't realize is when we had Iveco, which was the heavy-duty truck business, we had to allocate a lot of the capital that we generated to support that business. And so for the last 2 years now, we get to divert back and, you know, we're spending $1 billion a year on CapEx and R&D just for our agriculture and construction business. And, you know, these are, you know, the returns on invested capital are approaching 20%. So we get to invest at a much higher return than we could historically. And as we simplify the story, we start to invest a little better. We think there's a great future. So, you know, I, I get most of my compensation is in stock anyway, but I've added to that with a few million dollars cuz I'm so confident in where we're going. And unfortunately we're in a bit of a, a period now. We talked about the delisting. So between now and January 2nd, all of our shares that are held by European funds have to sell. So we've got, unfortunately, a lot of sellers coming into the market that are artificially high as these companies aren't allowed to hold U.S. companies anymore. There's a lot of selling pressure on the stock right now that's making it artificially low, which really creating a great opportunity. Interesting, was listening to your podcast with David Harrow on the other day.

David's a fan. David likes the stock.

He's a very good investor and a fan. So glad to have him see the value in what we're doing.

Thank you, Scott, and thank all of you for listening. Meta Lutzoff is our producer. Meta, I feel like we got really hardly any Meta time this episode. What's something that you're involved in? Give me some zany adventure. Give me, give me one line totally out of context on something that you're into or doing. We're getting a new couch. Enough said. Subscribe to the podcast at Apple Podcasts, Spotify, or wherever you listen. If you listen on Apple, you could write us a review. See you next week.

Data is everywhere. When orchestrated properly, it sings. At Morningstar, we analyze and enrich data, making it actionable and powerful for you. Morningstar, where data speaks.