As Housing Recovers, Will Machinery Stocks Outperform?

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The global economy continues its gradual, if painfully slow, recovery from the financial crisis.  In particular, the housing market in the United States looks to be in the beginning stages of a clear recovery after its huge collapse.  The Commerce Department announced that home construction surged over 12% in December to end the best year since 2008.  In light of this, is it time to invest in heavy machinery stocks?

Caterpillar (NYSE: CAT) is the heavy machinery giant in the United States.  Caterpillar has a market cap of $63 billion, and is trading at a fairly conservative price-to-earnings ratio of less than 10.  Caterpillar confirmed the recovery in construction when it released its third-quarter results.  Revenues through the first nine months of the year climbed more than 16% year over year.  Furthermore, diluted earnings per share surged more than 46%, and Caterpillar increased its dividend almost 9%. 

These positive results for Caterpillar were driven primarily by two geographic segments:  North America and China, where sales increased by 9% and 8%, respectively.  Caterpillar’s results help confirm the housing recovery trend in the United States.

Cummins (NYSE: CMI) is a United-States based machinery company with a market value of roughly $21 billion.  Like Caterpillar, Cummins also pays a dividend, which it increased by 25% in 2012. 

Cummins, however, has not performed as well as Caterpillar in 2012.  Sales through the first nine months of the year were down a fraction of a percent.  Meanwhile, operating income declined nearly 7.6% during the first three quarters versus the same period in 2011. 

Perhaps most troubling for the company’s third quarter report was that it struggled in the emerging markets.  Cummins reported lower demand for its equipment in Brazil and China, two of the emerging markets expected to be leaders in global growth going forward.  Nevertheless, shares of Cummins experienced a strong rally in 2012.  The company’s stock price surged from $91 to begin 2012 to its current level of higher than $110, a rise of more than 20%.  Investors would be well-advised to wait for full-year results and 2013 demand expectations before jumping in to Cummins shares.

CNH Global (NYSE: CNH) is an international construction equipment company based in the Netherlands.  CNH manufactures and distributes a line of agricultural and construction equipment and parts worldwide. It operates in two core segments: Agricultural Equipment and Construction Equipment.  For an investor interested in geographical diversification in the heavy machinery industry, CNH is worth a closer look. 

The company holds a $10 billion market capitalization and trades for a modest trailing 12-month P/E ratio of less than 9.5 times.  Income investors may be deterred by the fact that CNH hasn’t paid a regular annual dividend since 2008.  Investors did, however, receive a $10 special dividend in December 2012.  The company performed well during the fiscal third quarter of 2012.  Net sales increased by almost 5%, and diluted earnings per share climbed by more than 17%.  CNH also confirmed full-year 2012 guidance of revenues increasing by 5%.

Bottom Line

While it may seem hard to believe, the U.S. housing market appears to be on the road to recovery.  Many analysts now believe that residential housing construction will add to the economy in 2012 for the first time since 2005.  For investors who want to get ahead of this possible tailwind for the U.S. economy, these three machinery stocks appear to be executing well.  In addition, these three stocks are trading for reasonable valuation multiples, and may be worthy of further research.

Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends Cummins. The Motley Fool owns shares of Cummins. 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!

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