Betting on Coal and Cranes Is Safer This Year
Ranu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The global economy is slowly recovering. As machinery and equipment are a significant part of any industry, a recovering economy leads to industrial expansion, which eventually leads to higher sales for machinery equipment. I have analyzed three machinery companies: Joy Global (NYSE: JOY), Lindsay (NYSE: LNN) and Manitowoc (NYSE: MTW). Let’s find out whether these stocks are worthy of long-term growth or not.
Return of coal
The rising demand of electricity coupled with the high price of natural gas in the overseas markets resulted in increasing demand for coal as a primary fossil fuel. This gives an opportunity to Joy Global to reposition itself in the global coal industry. Two-thirds of its revenue is delivered from coal producers globally. The mining industry is switching heavily toward emerging markets. Going forward, expansion of developing economies such as China and India are indicators of future growth for Joy Global.
India is a heavy user of coal, which currently meets 55% of the country’s power needs. Coal imports in India are expected to reach between 165 million tons and 180 million tons during 2013 and 2014, exceeding prior-year imports by 30 million tons. Joy Global’s plan to set up its Indian manufacturing base in West Bengal is a step to solidify its presence in the Indian coal market. The company, along with its Indian subsidiary P&H Joy Mining Equipment India, sells gears of around $88 million a year in India. This project is divided into two phases.
In the first phase, it will invest about $25 million to set up an integrated facility to give after-sales services as well as manufacture major structures used in mining equipment. In the second phase, the manufacturing facility will be further expanded to boost product indigenization. It is planning to fully indigenize one of its best selling pieces of opencast-mining equipment, a 10 cubic meter excavator. Currently, this equipment includes 55% of Indian supplies in value terms.
Joy Global is the largest supplier of coal mining equipment in China. Last year, Joy Global's sales declined 22% as slower economic growth from the U.S. and China forced miners to cut capital expenditure. China contributes around 18% of the company's revenue from coal-related activities.
With the improving economy, China’s power consumption is expected to increase by 8.5% this year. Industry projections predict China’s electricity demand to be more than double by 2040, and the majority of this demand will be fueled by coal. This is a tipping point for Joy Global to benefit from increased coal demand. However, at present, the stock is trading near its six-month low, but the price is sure to rise significantly with the improving Chinese economy.
Lindsay is a leading provider of irrigation systems that conserve water and energy in the U.S. and internationally. I have analyzed this company on below mentioned points that are good for Lindsay in the near term, but not for long-term growth.
First, the company posted strong earnings in the second quarter of 2013. Domestic irrigation sales rose 41% year-over-year and international sales rose 33% year-over-year due to increased demand resulting from higher commodity prices and farm incomes along with drought conditions in the U.S.
However, the ongoing recession in the U.S. and international markets could adversely affect farmers’ ability to buy irrigation equipment. Higher expectations of record-crop planting and improved yields will lead to lower commodity prices, which in return could reduce demand over the next 18 months. Also, the non-recurrence of drought conditions in the U.S. won’t give similar year-over-year growth to Lindsay in the future.
Secondly, Lindsay posted a surprising 82.5% rise in its backlog, or un-shipped orders from $85 million in 2012 to $159 million in 2013. This involves robust domestic irrigation volume and a $39.1 million contract in the Middle East consisting of irrigation machines and ancillary equipment.
Seeing the Middle East’s water scarcity, it would be worth watching how the contract works. However, higher backlog growth in the first two quarters of 2013 has pulled the demand forward due to drought concerns, and this may result in reduced demand in the next 18 months, which isn’t a good sign for the company.
Cranes are the growth driver
Manitowoc reported robust sales of $898 million, up 5.4% in the first quarter of 2013 from sales of $851.9 million in the year-ago quarter. Performance was mainly driven by a 7.8% increase in crane-segment sales due to continued growth in the Americas region and strong demands in the emerging markets of Asia, Latin America, and Commonwealth of Independent States, or CIS, region. The backlog for cranes reached $776 million as of March 31,an increase of $20 million from year-end 2012.
At the BAUMA trade show, the company booked significant crane orders for delivery in 2013. It also launched new products and technologies such as the Manitowoc Falcone, Global CraneSTAR Express, and CCS, or common control system, technology to enhance productivity. And seeing the rising commodity costs in the food-service industry, I expect a significant rise in new-equipment demand.
Additionally, Manitowoc completed the acquisition of Potain SA, the tower crane subsidiary of the French industrial concern, Legris Industries. This will allow Manitowoc to further penetrate key European and Asian markets with a greater variety of lifting solutions. Management expects Potain to generate more than $200 million in revenue in what remains of this year. Now, as Potain is a part of Manitowoc's crane operations, the company is very close to achieving its 2002 goal of $1.3 billion in consolidated revenue.
However, continuous weakness in the Euro zone muted industrial growth, resulting in a recession all across Europe. The combined economy of the 17 countries declined by 0.2% in the first three months of 2013 compared to the prior quarter. As a result, Manitowoc's 7.8% sales growth in the crane segment includes a negative $0.3 million impact from currency exchange. To offset this muted growth, the company has accelerated its lean initiatives by boosting manufacturing efficiency and manufacturing throughput Europe.
Apart from that, its debt-reduction plan is also attractive. The company repaid around $80 million of debt in 2012, bringing down the total amount of debt to $1.9 billion as of March. 31. Manitowoc is focused on repaying at least $200 million of debt by year's end.
To sum up, I recommend buying the stocks of Joy Global and Manitowoc for long-term growth. Joy Global has a big opportunity in India and China due to higher coal demand. Manitowoc has a bright future due to strength in both its crane segment and debt-reduction plan.
However, I am cautious about Lindsay’s long- term growth. Factors like an ongoing recession followed by falling corn prices will restrict Lindsay’s growth in 2013. So, I advise to holding this stock.
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Ranu Devi has no position in any stocks mentioned. The Motley Fool owns shares of Lindsay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!