Can These Heavy-Equipment Stocks Power Your Portfolio?
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Heavy equipment has experienced a rough patch over the past few years. With construction down in the developing world due to the recession, the developed world's infrastructure being mature and not needing much work and mineral resources becoming increasingly difficult to tap, the demand for heavy machinery has waned somewhat. However, long-term contracts tend to make demand among major clients more stable than the fickleness of the ordinary consumer. Let's see how some of this segment's players are faring.
It's still running
Deere (NYSE: DE) has factories all over the world, including a significant number in the US. Having operations worldwide allows the company to work well with currency fluctuations and turn them into advantages instead of the hardship many people assume they are. Working as one of the largest producers of agricultural machinery there is, and having an easily-identified brand, Deere does have a substantial moat. It's 2.3% dividend yield and 8.5% profit margins aren't bad either. Overall, Deere is a decent company that's trading at a reasonable price at around 10 times its earnings.
The only two concerns an investor should have are that the company is trading at 4.1 times its book value and that it is all about fossil-fuel powered engines. As emissions standards change, the company may find that its massive diesel engine operation needs to change in expensive ways. This could be costly. And for a company that manufactures heavy equipment, trading for four times its book value is unusual and costly.
On the whole, I would recommend Deere.
Digging for greatness
Joy Global (NYSE: JOY) is a mining equipment manufacturer, servicer and parts distributor. Since it operates on the three most important aspects of equipment, Joy has a solid hold on its customer base and reasonable security in its continued business.
The company pulls a 13.3% profit margin, which gives it plenty of money to expand and make alterations as needed, and pays a 1.3% dividend it can easily afford. Joy is even trading for around 8 times its earnings, which is a great deal. Joy also has solid prospects because it's in the process of acquiring International Mining, China's largest long-wall mining shear manufacturer. With coal being a huge part of industrialization and much of Asia industrializing and growing rapidly, there is a lot of market opportunity Joy Global can break into.
Of course, there is the issue of coal becoming less popular with each passing year. It's dirty and puts toxins in the air, and this is both bad and unpopular. In time, more of the world is likely to become more environmentally conscious and begin heavily regulating or outright banning the use of coal. Joy will have to think quickly when that happens. As a play for the next few years, I'd suggest Joy Global. But there will come a time to sell, and that time may only be a decade or so down the line.
A huge infrastructure play in a small cap
Lindsay (NYSE: LNN) is a relatively small company valued at around $1 billion as of this writing. Lindsay's share price is growing, and it's acquiring businesses like Stettyn and Barrier Systems to shore up its hold on infrastructure. The company works with railways, waterways and roads among other infrastructure, and its business is helping people and goods move faster.
Lindsay has a 9.9% profit margin, which gives it the cash to grow and adapt to the changes it's helping to create. As a tiny company, there is a lot of room for share- price appreciation - $1 billion could reasonably reach $3 billion or $4 billion in the next few years. While there is a 0.6% dividend, it seems more of a token payment that shouldn't have a detrimental effect on cash flow. Lindsay is even trading at less than 17 times its earnings, which is lower than the S&P as of this writing.
Overall, you would be wise to look into this company. It might be a decent deal on a good stock.
The Foolish bottom line
Farm and construction equipment isn't exactly in its heyday. But things are progressing, and these businesses are thriving. They are in an unpopular place, and this might be your chance to get a solid deal on great companies.
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Chris Hodge 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!