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Zacks Industry Outlook Highlights Caterpillar, Komatsu and H&E Equipment Services

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·11-min read
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For Immediate Release

Chicago, IL – March 9, 2022 – Today, Zacks Equity Research discusses Caterpillar Inc. CAT, Komatsu Ltd. KMTUY and H&E Equipment Services, Inc. HEES.

Industry: Construction Mining Equipment

Link: https://www.zacks.com/commentary/1878778/3-construction-mining-equipment-stocks-to-ride-on-strong-demand

The Zacks Manufacturing - Construction and Mining industry is well-poised to gain from the ongoing expansion in manufacturing activity. As economies started reopening and businesses resumed operations, the sector has bounced back strongly from the contraction suffered due to the COVID-19 pandemic.

The manufacturing sector has been gaining momentum ever since, with new orders and production on a roll. Industry players like Caterpillar Inc., Komatsu Ltd. and H&E Equipment Services, Inc. are positioned well to gain on this trend. The players have been focusing on cost-cutting efforts and investment in digital initiatives to drive growth.

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, as well as 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.

The products are varied, including loaders, pavers, dozers, excavators, concrete mixer trucks, crushing, pulverizing & screening equipment, tractors, and cranes. The industry participants also support oil and gas, power generation, marine, rail, and industrial applications through their reciprocating engines, generator sets, gas turbines and turbine-related services.

What's Shaping the Future of Manufacturing - Construction and Mining Industry

Solid Demand in the Manufacturing Sector:  Ever since the economy started recovering from the pandemic-induced lull, the manufacturing sector has been witnessing improvement in new orders and production. Manufacturing activity has increased for the 21 consecutive months in February 2022. Per the Federal Reserve, total industrial production rose at an annual rate of 4% in the fourth quarter of 2021, with manufacturing output up an annual rate of 5%. In January 2022, industrial production increased 1.4%.

Manufacturing output and mining production rose 0.2% and 1%, respectively. Per the U.S. Census Bureau, new orders for manufactured durable goods for the 12 months ended January increased 16.5% year over year. Orders for capital goods (excluding aircraft), which is a closely watched indicator for business spending plans, shot up 10.2% during the same period. Business spending on equipment is on track for robust growth.

Improvement in Mining & Construction Instills Optimism: Improving commodity prices will boost spending in the mining industry. The intensifying global focus on shifting from fossil fuels to zero emissions will require a large number of commodities, which, in turn, will support the demand for mining equipment in the years to come.

In the United States, solid prospects of the housing market, backed by the rising need for more work-at-home spaces and record-low mortgage rates, are expected to act as tailwinds for construction equipment manufacturers. The U.S government's plans to increase investment in infrastructure construction — particularly in critical subsectors such as transportation, water and sewerage, and telecommunications — will support demand in the coming years.

Cost Inflation & Supply-Chain Issues Persist:The industry is currently facing input cost inflation (mainly steel), transport and logistic costs. It has been struggling to keep up with the increase in demand due to the shortage of labor, supply-chain issues, high raw material lead times and continued shortages of critical materials.

The industry players are making every effort to bolster their financial condition, conserve cash and improve profitability. The companies have been 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 bolster their performances.

Investment in Digital Initiatives to be a Game Changer: The industry participants are investing in digital initiatives like AI, cloud computing, advanced analytics and robotics. Digital transformation aids organizations in boosting productivity, increasing efficiency, reliability and safety, thereby enhancing customer satisfaction.

With the pressing need to cut down carbon emissions, mining companies worldwide are relying more on autonomous machinery. Thus, the companies are stepping up their research and technological capabilities to bring products into the market equipped with the latest technology.

Zacks Industry Rank Indicates Bright Prospects

The group’s Zacks Industry Rank, which is 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, which is part of the broader Zacks Industrial Products Sector currently, carries a Zacks Industry Rank #110, which places it at the top 44% of 252 Zacks industries.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a solid earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. Over the past year, the industry’s earnings estimates for the current year have been revised upward by 16%.
 
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Underperforms Sector & S&P 500

The Manufacturing - Construction and Mining industry has underperformed its sector and the Zacks S&P 500 composite over the past year.

Over this period, the industry has fallen 10.3% compared with the sector’s decline of 8.5%. The Zacks S&P 500 composite has gained 11.7% in the same time frame.

Industry's Current Valuation

On the basis of the forward 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing Manufacturing - Construction and Mining companies, we see that the industry is currently trading at 10.18 compared with the S&P 500’s 13.45 and the Industrial Products sector’s trailing 12-month EV/EBITDA of 16.69.

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 10.53.

3 Manufacturing - Construction & Mining Stocks to Watch

H&E Equipment Services: The company continues to grow its fleet, and the fleet age as of Dec 31, 2021, was 40.3 months compared with the industry average of 53 months. This provides it an edge over its competitors. The sale of its crane business makes it a pure-play rental business and poises it well for continued expansion in the equipment rental business.

Equipment rental demand is likely to remain strong through 2022, with broadening activity in the non-residential construction and industrial end markets. H&E Equipment will gain from its acquisition strategy, which focuses on identifying and acquiring rental companies to complement its existing business, broaden its geographic footprint, and increase density in existing markets.

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. Its shares have declined 3.4% in the past month due to the ongoing supply-chain headwinds and cost issues plaguing the industry.

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 has been revised upward by 9.6% in the past 90 days.  The consensus mark indicates year-over-year growth of 34.9%. HEES has a trailing four-quarter earnings surprise of 21.1%, on average. The company has an estimated long-term earnings growth rate of 39.8%. It currently sports a Zacks Rank #1 (Strong Buy).

You can see the complete list of today’s Zacks #1 Rank stocks here.

Caterpillar: The company’s sales have been improving over the past few quarters, courtesy of higher demand across all segments and geographies. Meanwhile, its commitment to control costs has been driving margins. Caterpillar’s backlog was a solid $23 billion at the end of 2021, which will boost its top line in the upcoming quarters.

The company is anticipated to gain from strong demand from the manufacturing sector, strength in residential construction and non-residential construction in the United States, and robust demand for mining equipment. Caterpillar continues to focus on customers and the future by continuously investing in digital capabilities, connecting assets and job sites, and developing the next generation of more productive and efficient products, which provide it a competitive edge. Its shares have declined 2.9% in the past month mainly due to the inflated input costs and supply-chain headwinds.

Known for its iconic yellow machines, Deerfield, IL-based Caterpillar is the largest global manufacturer of construction and mining equipment. The Zacks Consensus Estimate for the company’s ongoing-year earnings indicates year-over-year growth of 13.8%. The estimate has moved up 0.33% over the past 90 days. The company has a trailing four-quarter earnings surprise of 24.1%, on average. CAT has an estimated long-term earnings growth rate of 12% and it currently carries a Zacks Rank #3 (Hold).

Komatsu: Komatsu continues to strengthen the Autonomous Haulage System, in sync with its growth strategies. As of December 2021, the company has 477 trucks commissioned with its autonomous system. The company has been witnessing strong demand for construction, mining and utility equipment over the past few quarters. It is anticipated to gain from strong 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 will likely be supported by higher sales of machine tools in the automobile manufacturing industry and demand for the Excimer laser-related business for the semiconductor manufacturing industry. It will also benefit from its cost-reduction efforts. The company’s shares have declined 4.6% in the past month, reflecting the impacts of increased raw material and logistic costs.

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 30 days. The consensus estimate indicates 85.8% year-over-year growth. KMTUY has an estimated long-term earnings growth rate of 30.7%. It currently carries a Zacks Rank #3.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance  for information about the performance numbers displayed in this press release.


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