These 2 Machinery Stocks will Shine in 2013
Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Last year was a year of decreased capital spending on equipment. This forced various equipment manufacturers to look for new opportunities to keep the momentum going. These companies are looking for expansion in the Asia-Pacific and Latin America, either through joint ventures or through acquisitions.
Towards the end of 2012, the industrial numbers seemed to be improving gradually. Industrial Production rose by 1% and manufacturing output rose by 0.2%. At the same time, there was an increase of 13% and 6% in industrial machinery and mining equipment shipments respectively.
This improvement in industrial and mining machinery can be seen as a silver lining for the growth of machinery companies. Below, I have discussed three companies, which deal in industrial as well as farming equipment. Let's analyze their stocks and find out whether there exists an opportunity for the investors or not.
The Manitowoc Company (NYSE: MTW) - Margin enhancement and debt reduction
Manitowoc reported its fourth-quarter 2012 results with total sales up by around 10% to $1.13 billion. This was mainly fueled by its cranes segment, which posted an increase of 12% year-on-year in sales to $767 million. This increment resulted from strong sales in the domestic market, and increasing demand from the emerging markets. Sales in the company's food-service segment grew 7% because of the stable growth and the continuous innovation in the product line. Management guided that in 2013, crane revenue will grow in high single-digit and food service growth will be in mid single-digit as well.
Moving forward, future orders for cranes fell around 20%, due to the concerns of the fiscal cliff and pricing issues. However, the company is continuously focused on expanding its margins in cranes through various initiatives. Various measures such as pricing, cost takeout, and manufacturing efficiencies are already implemented by the company. These initiatives will drive more than 30% of incremental margin in 2013.
Another favorable factor for investors is its debt reduction plan. Manitowoc has a high amount of debt load, which restrains it from investing in other businesses or return cash to its shareholders. The company repaid around $80 million of debt in 2012, bringing down the total amount of debt to $1.8 billion.
Recently, the company sold its Jackson warewashing business for $26 million. This sale will help Manitowoc to focus on its core food-service segment in a better way. Proceeds from this sale will be used to pay the long-term debt of the company. I expect it to reduce its debt level by around $200 million in 2013.
Overall, I believe Manitowoc is on track with its debt reduction plan which will be a positive sign for its shareholders. Moreover, the improved margins will further the profitability of the company in 2013.
Joy Global (NYSE: JOY) - All eyes on China
Joy Global reported its results for the first quarter of 2013, with net sales increasing by just 1% to $1.1 billion. The upside was driven mainly by higher sales of surface mining equipment, which rose by 13.7%. However, this was offsetted by declining sales in underground mining equipment by approximately 7.7%. The company also lowered its cost base by 8.2% to $ 157.3 million, which helped it in coping up with margin pressures.
Joy has increased its exposure in China, which is the world’s fastest growing coal mining market. As demand improves in China, Joy plans to increase its equipment manufacturing capacities at its International Mining Machinery (IMM). Joy is using its technological advantage to improve the quality of IMM's products. Currently, IMM contributes around 20% to Joy’s sales, and the company is targeting at taking it to around 60%.
Through IMM, Joy will enhance its export activities to other developing markets, and it will be also be able to penetrate the local mid-tier market. I expect 2013 to be a recovery year for Joy Global. The rising demand for electricity in China will increase coal mining activities that will lead to improved demand for Joy’s products.
Joy being the largest supplier of mining equipment in China has a huge scope to even increase its after-market business. After-market revenue constitutes earnings from parts sales, machine rebuilds and service revenue. The after-market business contributed around 52%, or $2.8 billion, to the company's revenue in 2012. Joy is aiming to further increase that share to around $4 billion in revenue by 2017. Increased exposure to after-market business provides downside protection for backlog cancellations. I believe this measure could prove beneficial in the long-term for the company.
I believe that in 2013, the increased exposure to the Chinese market, along with the company's focus on its after-market business, will drive its way to future growth. Its direct sales strategy to reach customers will prove beneficial in both products and after-market sales.
Lindsay Corporation (NYSE: LNN)
Lindsay reported fiscal year 2013 first quarter revenue of $147 million, an year-over-year increase of 24%, and EPS of $1.15 as compared to $0.23 in the previous year. The results were driven by increase in irrigation equipment margins, fixed cost leverage on higher sales, and due to farmers' prediction of dry weather which increased acreage planting. This, in-turn, increased farmers' spending on purchasing new irrigation equipment. Total irrigation equipment revenue increased 33% year-on-year to $134.2 million.
Domestic corn planting has increased in the past three years in order to fulfill increasing demand, and because of supply issues due to undependable weather. However, moving forward, the various market fluctuations such as slowdown in demand, and falling corn prices will affect Lindsay's profitability. Falling corn prices directly imply less income for the farmers, and as a result, less spending on equipment.
Moreover, record spending on irrigation equipment in the last two years has led to a market saturation point. I expect farmers' income to remain flat this year, and to further fall in 2014. Based on these economic dynamics, I believe the farming cap-ex will also remain flat in 2013, resulting in the company's irrigation sales to decrease by around 1.5%.
Even after posting good quarterly results, the prospects of Lindsay do not attract me. Factors such as falling corn prices and a saturating market for irrigation equipment will limit the growth of the company in 2013.
To sum up, I feel both Manitowoc and Joy Global are well-placed in the industry to benefit from improving fundamentals. Manitowoc will be benefited from its focus on expanding cranes margins and substantial debt reduction. Similarly, Joy will get the advantage of its after-market segment, along with increased exposure in China. I recommend a buy for both these stocks.
On the other hand, unfavorable economic conditions will affect the sales of Lindsay, which can hurt returns to investors. My view on this stock is neutral.
ShwetaDubey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!