Billionaire investor David Einhorn has a new stock pick, CNH Industrial (CNH).
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The renowned hedge fund manager believes that the farm machinery maker’s shares are cheap and could double over the next couple of years as its earnings recover from an industry downcycle.
I’m bullish on the stock because of Einhorn’s strong endorsement, inexpensive valuation, and well-above-average dividend yield. Plus, sell-side analysts appear to agree with Einhorn’s bullish take on the stock and view it as having an attractive potential upside of 28.5% over the next 12 months.
What Is CNH Industrial?
Based in London, CNH Industrial has been around for nearly 160 years. The company is best known for manufacturing agricultural machinery like tractors, combines, and harvesters. It also has a smaller construction equipment segment that makes excavators, crawler dozers, and more.
Greenlight Jumps In
Einhorn oversees Greenlight Capital (GLRE), a high-profile hedge fund with $2.4 billion in assets under management (AUM). He rose to fame with his well-timed bet against Lehman Brothers during the financial crisis, but his track record as an investor goes back further than that. After starting Greenlight Capital in 1996, the fund reportedly posted impressive annualized returns of 26% over the next decade.
Greenlight Capital just filed its latest 13F, which shows the firm has initiated a new position in agricultural equipment maker CNH Industrial. The filing shows Einhorn’s firm bought 7,096,900 shares of CNH Industrial at an average price of $11.10, slightly above today’s price of $10.66.
CNH Stock Is Super Cheap
Speaking at CNBC’s Delivering Alpha conference, Einhorn stated that CNH Industrial is “exactly the kind of situation that absolutely nobody cares about right now because it’s cheap, and the news over the next period isn’t going to be very good. Agriculture prices are low, and agricultural equipment is ending a down cycle,”
Einhorn is right in pointing out that shares of CNH Industrial are cheap. The stock trades at just 8.8 times December 2024 earnings estimates of $1.15 per share. Agriculture is a cyclical industry, and with lower crop prices, CNH’s earnings are expected to fall to about $1.00 next year, but even then, the stock trades at just 10.9 times forward estimates, well below the market average. Einhorn says, “We’re about 10 times trough earnings and in a market where the price-to-earnings on average is about 23. That seems really good to me.”
In addition, Einhorn believes CNH Industrial could increase its earnings to $2 per share or more during the next upcycle as crop prices rise. Even if the stock continued to trade at its current multiple and received no multiple expansion, this earnings growth would lead to a double or more from here.
Returns to Shareholders
CNH Industrial offers investors multiple ways to win. In addition to being cheap, it pays a big dividend and returns capital to shareholders via share buybacks.
The stock currently yields an attractive 4.7%, nearly four times higher than the average 1.2% yield for the S&P 500 and higher than the 4.4% yield of 10-year treasury bonds. CNH’s dividend yield is also higher than that of peers like Deere (DE) and AGCO (AGCO), which yield 1.5% and 4.0%, respectively, making it a strong dividend stock.
The company is also buying back shares, which is a wise use of capital based on the stock’s inexpensive valuation. On the company’s third-quarter earnings call, CFO Oddone Incisa reaffirmed this commitment to returning capital to shareholders, stating, “We will return essentially all excess free cash flow to shareholders through dividends and share buybacks.” Since the start of 2023, CNH has bought back over 100 million shares and reduced its share count by 7%.
Is CNH Stock a Buy, According to Analysts?
Turning to Wall Street, CNH earns a Strong Buy consensus rating based on six Buys, five Holds, and zero Sell rating assigned in the past three months. The average CNH stock price target of $13.64 implies a 25.14% upside potential from current levels.
The highest analyst price target of $18.00 implies an even higher potential upside of nearly 70% from current levels. Meanwhile, even the lowest price target of $11.00 is slightly above the stock’s current price of $10.66, implying that much of the bad news about the down cycle could already be priced into the stock, potentially limiting downside.
Einhorn Gives CNH Industrial the Greenlight
I’m bullish on CNH Industrial stock. Einhorn has a strong track record as a top investor so when he pitches a new investment idea, it’s worth paying attention. Shares of CNH Industrial are inexpensive, and earnings should recover as the agriculture cycle eventually picks up again, which should create significant upside for the stock even without any expansion of its multiple.
Meanwhile, the company is buying back shares while they are cheap, and the stock yields an attractive 4.7%, sweetening the deal for investors while they wait for this potential cyclical recovery.
