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Zacks Industry Outlook Highlights: Caterpillar, Komatsu and Manitowoc Company

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·10 min read
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  • CAT
  • 6301.T
  • MTW
  • ^GSPC

For Immediate Release

Chicago, IL – November 2, 2021 – Today, Zacks Equity Research discusses Construction & Mining, including Caterpillar Inc. CAT, Komatsu Ltd. KMTUY and The Manitowoc Company, Inc. MTW.

Link: https://www.zacks.com/commentary/1820864/3-construction-mining-equipment-stocks-to-gain-on-strong-demand

The Zacks Manufacturing - Construction and Mining industry is well-poised to gain on the ongoing expansion in manufacturing activity. The sector bounced back strongly since the contraction suffered in the March-May period last year due the COVID-19 pandemic, as economies started reopening and businesses resumed operations.

The manufacturing sector has been gaining momentum ever since, with new orders and production on a roll. Industry players like CaterpillarKomatsu and Manitowoc Company 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 in the construction of commercial, institutional and residential buildings, and infrastructure projects. The equipments are utilized in underground mining, drilling, and mineral processing, and surface mining to extract and haul metals, coal, oil sands, aggregates and other minerals and ores.

The products also include loaders, pavers, dozers, excavators, concrete mixer trucks, tractors and cranes. The industry supports 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

Expansion in Manufacturing Activity:  Ever since the economy started recovering from the pandemic induced lull, the manufacturing sector has been on a high — witnessing improvement in new orders and production. Manufacturing activity has now increased for the 16th consecutive month in October.

For the third quarter, total industrial production rose at an annual rate of 4.3%, while manufacturing output increased at an annual rate of 5.3%. Per the U.S. Census Bureau, new orders for manufactured durable goods till September have increased 24.7% year over year. Orders for capital goods (excluding aircraft), which is a closely watched indicator for business spending plans, shot up 16% on a year-on-year basis in September.

Business spending on equipment is on track for robust growth. Manufacturers have been benefiting from higher demand for goods, both domestic and external.

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 amount 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 a tailwind for construction equipment manufacturers. The 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.

High Costs & Supply Chain Issues Persist: The industry is currently facing input cost inflation (mainly steel), transport and logistic costs. It is struggling to keep up with the increase in demand due to shortage of labor, supply chain issues, high raw materials 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. These companies are focused on streamlining their operations and realigning around high-growth key markets or customer segments to bolster performance.

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 #101, which places it at the top 40% of 252 Zacks industries.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of 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 35%.
 
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 In-Line With Sector, Lags S&P 500

The Zacks Manufacturing - Construction and Mining industry has performed in-line with its own sector. It has lagged the S&P 500 composite over the past year.

Over this period, the industry has gained 26.7%, in-line with the sector's growth. Meanwhile, the S&P 500 composite has rallied 40.8%.

Industry's Current Valuation

On the basis of 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 10.03 compared with the S&P 500’s 14.73 and the Industrial Products sector’s trailing 12-month EV/EBITDA of 18.27.

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 10.91.

3 Manufacturing - Construction & Mining Stocks to Watch Out For

Komatsu: Komatsu continues to strengthen the Autonomous Haulage System (“AHS”), in sync with its growth strategies. As of September 2021, the company has over 400 trucks commissioned with its autonomous system. Marking an industry first for autonomous haulage, mining companies have now hauled more than four billion metric tons of materials leveraging Komatsu’s FrontRunner AHS.

The company has been witnessing strong demand for construction, mining and utility equipment over the past few quarters, leading to share price gain of 12.6% over the past year. The company is anticipated to gain on 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 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 Zacks Consensus Estimate for the Tokyo, Japan based company’s current-year earnings has been revised upward by 11% over the past 30 days. The company has a trailing four-quarter earnings surprise of 61.1%, on average. Komatsu has an estimated long-term earnings growth rate of 29.8%. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Manitowoc: Manitowoc has been witnessing high customer demand across the board this year. Backlog at the end of the second quarter of 2021 was the highest seen in the last three years. Backed by this, the company’s share price has gained a whopping 173% in a year’s time.

The company’s innovation pipeline remains robust and its aftermarket business continues to perform well. It remains focused on improving this crucial part of its business. In sync with this, Manitowoc acquired the crane business of H&E Equipment Services, which will expand its ability to provide rentals, new sales, used sales, aftermarket parts, and service to a variety of end market customers.

The company remains committed to cash preservation and balance sheet management while funding critical programs for future growth. Given that the tower crane market in China is the largest in the world, Manitowoc is scaling up its Chinese tower crane business. It is also expanding its tower crane rental fleet in Europe.

These strategic initiatives along with the company’s pursuit of acquisition opportunities to accelerate product development programs in its all-terrain product line will help drive long-term growth.

The Zacks Consensus Estimate for this year’s earnings have gone up 15% in the past 30 days. The company has a trailing four-quarter earnings surprise of 23.8%, on average. This Milwaukee, WI based company currently sports a Zacks Rank #1.

Caterpillar: The company’s sales have been improving over the past few quarters, courtesy of  higher end use demand across all segments and geographies. Meanwhile, its enduring commitment to cost control has been driving margin. This has been instrumental in its share price appreciation of 25% in the past year.

Caterpillar’s backlog increased $2.2 billion to $20.6 billion at the end of the third quarter of 2021, which will boost its top line in the upcoming quarters. The company is anticipated to gain on 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 future by continuously investing in digital capabilities, connecting assets and jobsites, and developing the next generation of more productive and efficient products, which provides it a competitive edge.

The Zacks Consensus Estimate for the company’s ongoing-year earnings has moved up 1% over the past 30 days. The company has a trailing four-quarter earnings surprise of 30.2%, on average. Caterpillar has an estimated long-term earnings growth rate of 12% and a Zacks Ranked #3 (Hold).

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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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