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Zacks Industry Outlook Highlights Caterpillar, Komatsu and Terex

For Immediate Release

Chicago, IL – July 14, 2022 – Today, Zacks Equity Research discusses Caterpillar Inc. CAT, Komatsu Ltd. KMTUY and Terex Corp. TEX.

Industry: Construction - Mining

Link: https://www.zacks.com/commentary/1951638/3-construction-mining-equipment-stocks-to-ride-demand-trends

The Zacks Manufacturing - Construction and Mining industry is well-poised to gain from the expansion in manufacturing activity witnessed over the past 25 months. The industry players have been benefiting from strong demand in their end markets, which will continue to support their performance. Pricing actions undertaken by the companies will help offset ongoing supply chain snarls and inflationary pressures.

Industry players like Caterpillar Inc., Komatsu Ltd. and Terex Corp. are well-poised to gain from 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. 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

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 25 consecutive months in June 2022.

Per Federal Reserve's release dated Jun 17, industrial production has increased every month this year till May, with an average monthly gain of 0.8%. Per the U.S. Census Bureau, new orders for manufactured durable goods in the five-month period ended May increased 10.9% 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.

Demand in Mining & Construction to Remain Strong: 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. 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 a seven-stock group within the broader Zacks Industrial Products Sector currently, carries a Zacks Industry Rank #88, which places it at the top 35% of 251 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. So far this year, the industry's earnings estimates for the current year have been revised upward by 2%.
 
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 Versus Broader Market

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

Over this period, the industry has slumped 18.6% compared with the sector's decline of 24.3%. The Zacks S&P 500 composite has fallen 12.2% 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 9.64 compared with the S&P 500's 11.6 and the Industrial Products sector's trailing 12-month EV/EBITDA of 13.66.

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 10.44.

3 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. 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 higher sales of machine tools in the automobile manufacturing industry and demand for the Excimer laser-related business for the semiconductor manufacturing industry. Its efforts to provide zero-emissions solutions for its global customers will be a growth driver. It will benefit from its cost-reduction efforts. However, the company's shares have declined 9% in the past three months, 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 7.5% year-over-year growth.

The company has a trailing four-quarter earnings surprise of 50%, on average. KMTUY has an estimated long-term earnings growth rate of 32.9%. It currently carries a Zacks Rank #1 (Strong Buy).

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

Caterpillar: The company's revenues and earnings have been growing year over year for five straight quarters thanks to its cost-saving actions, strong end-market demand and pricing actions. Caterpillar's backlog was a solid $26.4 billion at the end of the first quarter of 2022, 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 constantly 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 23.4% in the past three months primarily due to the inflated input costs and supply-chain headwinds.

Known for its iconic yellow machines, 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 16.7%. The estimate has moved up 0.1% over the past 60 days. The company has a trailing four-quarter earnings surprise of 14%, on average. CAT has an estimated long-term earnings growth rate of 12%. It currently carries a Zacks Rank #3 (Hold).

Terex: The company has been delivering year-over-year growth in earnings over the past five quarters, supported by robust bookings and revenue growth and margin expansion in both of the business segments. Its backlog has been on an uptrend over the past six quarters and was a record $3.5 billion at the end of the second quarter of 2022.

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 will drive growth. In sync with this, it is investing in innovative products, digital innovation, expansion of manufacturing facilities and acquisitions.

Norwalk, CT-based Terex manufactures and sells aerial work platforms and materials processing machinery worldwide. The Zacks Consensus Estimate for earnings for the current year indicates year-over-year growth of 24%. The estimate has moved up 0.3% over the past 60 days. The company has a trailing four-quarter earnings surprise of 49%, on average. TEX has an estimated long-term earnings growth rate of 17.7% and 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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