Zacks Industry Outlook Highlights Caterpillar, Terex, H&E Equipment Services and Manitowoc
For Immediate Release
Chicago, IL – December 13, 2023 – Today, Zacks Equity Research discusses Caterpillar Inc. CAT, Terex TEX, H&E Equipment Services HEES and Manitowoc MTW.
Industry: Construction & Mining Equipment
Link: https://www.zacks.com/commentary/2196761/4-construction-mining-equipment-stocks-defying-industry-odds
The Zacks Manufacturing - Construction and Mining industry faces challenges due to a decline in orders, reflecting subdued customer spending. While elevated input costs pose a concern, signs of improving supply-chain issues offer some respite.
Despite this setback, increased infrastructure investment in the United States and demand from the mining sector, driven by the energy transition trend, are expected to buoy the industry. Key players, such as Caterpillar Inc., Terex, H&E Equipment Services and Manitowoc, are poised to benefit from these trends. Their emphasis on introducing technologically advanced products, productivity and efficiency enhancements will aid 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, 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, and screening equipment, tractors and cranes. 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.
Trends Shaping the Future of the Manufacturing - Construction and Mining Industry
13-Month Contraction Streak in U.S. Manufacturing Acts as a Woe: Per the Federal Reserve's latest update, industrial production dipped 0.6% in October 2023, with manufacturing output falling 0.7%. Overall, industrial production has slipped 0.7% over the 12 months ended October 2023. The Institute for Supply Management's manufacturing index was 46.7% in November, contracting for the 13th month in a row. The average for the 12 months ended November 2023 is 47.2%.
Customers have been curbing their spending amid the ongoing uncertainty in the global economy and persisting inflationary trends. The New Orders Index was 48.3% in November, languishing in the contraction territory for 15 months. Companies are still managing outputs appropriately as order softness continues. The industry has also been bearing the brunt of supply-chain issues. Some industry players have recently noted that supply-chain issues are easing.
Energy Transition Trend, Construction Spending to Aid the 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 mining equipment demand 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, should support demand in the coming years.
Higher Pricing, Cost Cuts to Boost Margins: The industry is facing input cost inflation, and transport and logistic costs. 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: 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, players in the industry are stepping up their research and technological capabilities to bring products into the market equipped with the latest technology.
Zacks Industry Rank Indicates Weak Prospects
The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dim 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 #230, which places it at the bottom 8% of 252 Zacks industries.
Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
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 underperformed the Zacks S&P 500 composite but beat its sector over the past year.
Over this period, the industry has risen 10.8% compared with the sector's growth of 5.1%. The Zacks S&P 500 composite has moved up 16%.
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 9.04 compared with the S&P 500's 10.96 and the Industrial Products sector's trailing 12-month EV/EBITDA of 16.13.
Over the last five years, the industry traded as high as 14.83 and as low as 7.04, the median being 10.20.
4 Manufacturing - Construction & Mining Stocks to Watch
H&E Equipment Services: The company reported a record adjusted EBITDA of $189 million, with an adjusted EBITDA margin of 47.2% (a year-over-year expansion of 440 basis points) in the third quarter of 2023. This was attributed to solid industry conditions, and the company's strong fleet growth and branch expansion.
Owing to the higher interest rates and delays seen in equipment deliverability, customers now prefer renting equipment rather than owning it, which works in favor of HEES. The company's fleet investment through the first nine months of 2023 was a record $595.2 million and its fleet size was higher than $2.7 billion as of Sep 30, 2023. HEES boasts the youngest fleet in the industry, with an average rental fleet age of 41.1 months as of Sep 30, 2023 (versus the industry's 49.2 months).
To capitalize on the ongoing demand, HEES has upped its gross fleet investment target to $650-$700 million for 2023. H&E also continues to grow its branch network through organic expansion and acquisitions, with 17 branches added from January to November 2023. It has recently agreed to acquire Precision Rentals, which will add two more locations. The company's shares have gained 4% over the past year.
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 fiscal 2023 earnings indicates year-over-year growth of 21.6%. The consensus mark has moved up 8% over the past 60 days. HEES has a trailing four-quarter earnings surprise of 21.4%, on average and an estimated long-term earnings growth rate of 13.4%. The company currently carries a Zacks Rank #3 (Hold).
You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Caterpillar: The company's revenues and earnings have been growing year over year for 11 straight quarters, owing to its cost-saving actions, strong end-market demand and pricing actions. CAT ended the third quarter of 2023 with an impressive backlog of $28.1 billion, which will support the company's top line in the upcoming quarters.
Caterpillar is anticipated to gain from strength in residential construction and non-residential construction in the United States. It is funding initiatives focused on areas of expanded offerings and services, and digital initiatives like e-commerce, sustainability and electrification, which will drive long-term growth. The stock has gained around 11% in a year, 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 48.7%. Earnings estimates have moved up 4% over the past 60 days. Caterpillar has a trailing four-quarter earnings surprise of 16.6%, on average. CAT has an estimated long-term earnings growth rate of 12%. The company currently carries a Zacks Rank #3.
Terex: The company has been delivering year-over-year earnings growth over the past 11 quarters, benefiting from strong demand and improved volumes. Its backlog was $3.3 billion at the end of third-quarter 2023, the second highest in recent history. This positions the company well for improved results in the coming quarters. TEX is progressing well on its "Execute, Innovate, Grow" strategy, which should drive growth. In sync with this, the company is investing in innovative products, digital innovation, the expansion of manufacturing facilities and strategic acquisitions. TEX shares have gained 18% over the past year.
Norwalk, CT-based Terex manufactures and sells aerial work platforms and material processing machinery worldwide. The Zacks Consensus Estimate for 2023 earnings indicates year-over-year growth of 60.9%. Earnings estimates have moved north by 2% over the past 60 days. TEX has a trailing four-quarter earnings surprise of 30.4%, on average, and an estimated long-term earnings growth rate of 11.7%. The company currently carries a Zacks Rank #3.
Manitowoc: The company has been witnessing high customer demand, as evident from its higher order levels and backlog. Backed by this, its share price has increased 53% in the past year. The company's innovation pipeline has been robust and its aftermarket business has been performing well. MTW remains focused on improving this crucial part of its business. The company is committed to cash preservation and balance sheet management, while funding critical programs for growth.
Given that the tower crane market in China is the largest in the world, Manitowoc is scaling up its China tower crane business. It is also expanding its tower crane rental fleet in Europe. These strategic initiatives, along with MTW's pursuit of acquisition opportunities to accelerate product development programs in its all-terrain product line, will help drive long-term growth.
Milwaukee, WI-based Manitowoc provides engineered lifting solutions in the Americas, Europe, Africa, the Middle East and the Asia Pacific. The Zacks Consensus Estimate for this year's earnings has increased 10% in the past 60 days. The consensus mark indicates year-over-year growth of 53%. The company has a trailing four-quarter earnings surprise of 885%, on average. MTW currently carries a Zacks Rank #3.
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H&E Equipment Services, Inc. (HEES) : Free Stock Analysis Report
