January 20, 2023 - Zacks Equity Research discusses Caterpillar Inc. CAT, Komatsu KMTUY, Terex Corp. TEX and H&E Equipment Services, Inc. HEES.
Industry: Construction and Mining
The Zacks Manufacturing - Construction and Mining industry is poised well to gain on solid demand from the mining sector fueled by the energy-transition trend and stepped-up infrastructure investment in the United States. Indications of easing supply-chain issues add to the optimism.
Players like Caterpillar Inc., Komatsu, Terex Corp. and H&E Equipment Services, Inc. are likely to ride on these demand trends. They would benefit from their efforts to bring technologically advanced products to the market. They have also been focusing on improving productivity and efficiency to counter the cost pressures.
About the Industry
The Zacks Manufacturing - Construction and Mining industry comprises companies that manufacture and sell construction, mining and utility equipment. They support customers using machinery in the construction of commercial, institutional and residential buildings, and infrastructure projects.
Their equipment is also utilized in underground mining, drilling and mineral processing, and surface mining to extract and haul copper, iron ore, coal, oil sands, aggregates, gold, and other minerals and ores. Their products are varied, including loaders, pavers, dozers, excavators, concrete mixer trucks, crushing, pulverizing & screening equipment, tractors and cranes. The industry participants support oil and gas, power generation, marine, rail, and industrial applications through their reciprocating engines, generator sets, gas turbines and turbine-related services.
4 Trends Shaping the Future of Manufacturing - Construction and Mining Industry
Easing Supply-Chain Disruptions: Per the Federal Reserve, industrial production decreased 0.2% in November 2022. Manufacturing output dipped 0.6% but remained 1.2% above last year. Overall, industrial production gained 2.5% over the 12-month period ended November 2022. In December, the Institute for Supply Management's (ISM) manufacturing index touched 48.9%, contracting for the second month in a row. The average for the past 12 months (ended December 2022), however, stood at 53.5.
Amid the ongoing uncertainty in the global economy and persisting inflationary trends, customers have been curbing spending. The manufacturing sector has also been bearing the brunt of the supply-chain issues. On a positive note, some of the industry players recently noted that supply-chain situation is improving. The delivery performance of suppliers to manufacturing organizations was reported to be faster for the third straight month in December. Once the situation normalizes, strong demand in the end markets would drive the industry's growth.
Demand Strength in Mining & Construction: The intensifying global focus on shifting from fossil fuels to zero emissions will require a large number of commodities, which in turn, will support demand for mining equipment in the years to come. The U.S. government's plans to increase investment in infrastructure construction — particularly in critical subsectors, such as transportation, water and sewerage, and telecommunications — shoukd support demand in the coming years.
Higher Pricing, Costs Cuts to Boost Margins: The industry is currently facing input cost inflation, transport and logistic costs. The industry players are focusing on pricing actions and efforts to improve productivity and efficiency. They are constantly implementing cost-reduction actions, which are likely to help sustain margins in this scenario. The companies are focused on streamlining their operations and realigning around high-growth key markets or customer segments to enhance their performances.
Investment in Digital Initiatives a Key Catalyst: The industry participants are investing in digital initiatives like AI, cloud computing, advanced analytics and robotics. Digital transformation aids organizations in boosting productivity and increasing efficiency, reliability and safety, thereby enriching customer satisfaction.
With the pressing need to cut carbon emissions, companies worldwide are relying more on autonomous machinery. Thus, the players in the Manufacturing - Construction and Mining industry are stepping up their research and technological capabilities to bring products into the market equipped with the latest technology.
Zacks Industry Rank Indicates Upbeat Prospects
The group's Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates bright prospects in the near term. The Zacks Manufacturing - Construction and Mining industry, a seven-stock group within the broader Zacks Industrial Products sector, currently carries a Zacks Industry Rank #34, which places it at the top 14% of 251 Zacks industries.
Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group's earnings growth potential. In the past six months, the industry's earnings estimates for the current year have been revised upward by 9%.
Before we present a few stocks that you may want to consider for your portfolio, let's look at the industry's recent stock-market performance and the valuation picture.
Industry Versus Broader Market
The Manufacturing - Construction and Mining industry has outperformed its sector and the Zacks S&P 500 composite over the past year. Over this period, the industry has gained 15% compared with the sector's decrease of 3.8%. The Zacks S&P 500 composite has fallen 13.2% in the same time frame.
Industry's Current Valuation
On the basis of the forward 12-month EV/EBITDA ratio, a commonly used multiple for valuing Manufacturing - Construction and Mining companies, we see that the industry is currently trading at 10.98 compared with the S&P 500's 10.26 and the Industrial Products sector's trailing 12-month EV/EBITDA of 15.34.
Over the last five years, the industry has traded as high as 14.83 and as low as 7.04, with the median being at 10.19.
5 Manufacturing - Construction & Mining Stocks to Watch
Komatsu: The company has been witnessing strong demand for construction, mining and utility equipment over the past few quarters. This has been instrumental in the 30% climb in its share price over the past three months. It is anticipated to gain from robust demand for its equipment. In North America, demand should remain steady in residential and non-residential as well as road and traffic infrastructure.
For industrial machinery, sales are likely to be supported by strong sales of the Excimer laser-related business for the semiconductor manufacturing industry. Its efforts to provide zero-emissions solutions for its global customers will likely be a growth driver. KMTUY will also benefit from its cost-reduction efforts.
Headquartered in Tokyo, Japan, Komatsu manufactures and sells construction, mining, and utility equipment; and forest and industrial machinery worldwide. The Zacks Consensus Estimate for the company's current-year earnings has been revised upward by 1% over the past 60 days. The consensus estimate indicates 9.4% year-over-year growth. The company has a trailing four-quarter earnings surprise of 30%, on average. KMTUY has an estimated long-term earnings growth rate of 7%. It currently carries a Zacks Rank #2 (Buy).
You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Caterpillar: CAT's revenues and earnings have been growing year over year for seven straight quarters, thanks to its cost-saving actions, strong end-market demand and pricing actions. Its backlog was a solid $30 billion at the end of the third quarter of 2022, which will support its top line in the upcoming quarters.
CAT is anticipated to gain from strength in residential construction and non-residential construction in the United States, and robust demand for mining equipment. It continues to invest in enhancing its digital capabilities, connecting assets and job sites, and developing the next generation of more productive and efficient products.
The company recently announced that it is investing in Lithos Energy, Inc., which produces lithium-ion battery packs. This is in sync with its commitment to support customers in their energy transition journey with lower-carbon advanced power technologies. The stock has gained 39% in the past three months aided by these tailwinds.
Known for its iconic yellow machines, Caterpillar is the largest global construction and mining equipment manufacturer. The Zacks Consensus Estimate for CAT's 2023 earnings indicates year-over-year growth of 10%. The estimate has moved up 2% over the past 60 days. CAT has a trailing four-quarter earnings surprise of 14.7%, on average. CAT has an estimated long-term earnings growth rate of 12%. The stock currently carries a Zacks Rank #3 (Hold).
H&E Equipment Services: The company recently signed an agreement to sell its Komatsu earthmoving distribution business, which combined with the sale of its crane business completed in 2021, makes it a pure-play rental business. HEES can focus on growing in the high-margin equipment rental business. Backed by these developments, shares of HEES have gained 57% over the past three months. Its acquisition strategy, which focuses on identifying and acquiring rental companies to complement its existing business, broaden its geographic footprint and increase density in the existing markets, bodes well.
At the end of the third quarter of 2022, the company had recorded fleet original equipment cost at $2.1 billion. Efforts to grow its Parts and Services operations will yield results, as it is a relatively stable high-margin revenue source. It also aids in developing customer relationships, attracting customers and maintaining a high-quality rental fleet. The company also continues to fervently expand its branch network.
Baton Rouge, LA-based H&E Equipment Services is one of the largest integrated equipment services companies in the United States. The Zacks Consensus Estimate for this year's earnings indicates year-over-year growth of 17.6%. The consensus mark has moved up 2.7% over the past 60 days. HEES has a trailing four-quarter earnings surprise of 41.7%, on average. H&E Equipment Services has an estimated long-term earnings growth rate of 31.5%. The stock currently carries a Zacks Rank of 3.
Terex: The company's backlog has been on an uptrend over the past eight quarters and was at $3.9 billion at the end of the third quarter of 2022. Compared to last year's levels, backlog improved 33% aided by improvement in both segments. This, along with solid demand, pricing and cost-saving actions, positions the company well for improved results.
TEX is progressing well on its "Execute, Innovate, Grow" strategy that should drive growth. In sync with this, it is investing in innovative products, digital innovation, expansion of manufacturing facilities and acquisitions. Terex is focused on aligning production and cost structure across its segments in response to the customer demand environment while also aggressively managing cost and working capital. Shares of TEX have gained 41% over the past three months.
Norwalk, CT-based Terex manufactures and sells aerial work platforms and materials processing machinery worldwide. The Zacks Consensus Estimate for 2023 earnings indicates year-over-year growth of 15.5%. The estimate has moved north 3.7% over the past 90 days. TEX has a trailing four-quarter earnings surprise of 35.7%, on average, and an estimated long-term earnings growth rate of 18.4%. The stock carries a Zacks Rank #3 at present.