2013 Outlook for Mining Equipment Companies
Zain is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The bears believe that Construction and Mining equipment manufacturers had a tough 2012 given lower-than-expected growth in Chinese GDP. On the other hand, bulls have got solid points to defend a strong 2013. Investors are desperately waiting for their earnings releases in order to judge who is right; the bears or the bulls?
Before discussing the earnings preview of different players in this industry, I would like to list the factors that bulls present to justify a bright 2013 for this industry:
(1) Key construction equipment markets in China and Latin America are at an inflection point,
(2) The US non-residential construction cycle is in the early stages of recovery, and
(3) Global miner reinvestment rates are approaching a trough, providing visibility on a modest recovery in 2014 compared to consensus expectations of a multi-year downturn.
The following paragraphs give a brief outlook for different companies in this space for 2013:
Caterpillar (NYSE: CAT): Guidance likely to be conservative, though expectations are already low
Caterpillar is recommended as a buy given that the key end markets are at a cyclical inflection point, expectations have been reduced, and the recent weakness in the yen drives an under-appreciated pricing and margin tailwind due to CAT’s net export position in Japan. The last time the yen weakened significantly – in 2H 2005-1H 2006 – CAT delivered the strongest price realizations of the cycle, with pricing accelerating 5%-6% from 1%-3% in preceding quarters. As a result, the incremental margins averaged 37% over that time period compared to 10% over the 2002-2008 cycle. Management is expected to introduce 2013 EPS guidance at $8.50 on Jan. 28.
Joy Global (NYSE: JOY): Achievable expectations despite sharper cuts to China coal CAPEX
The Street has reduced 2013-15 EPS expectations by an average of 3% to $6.33-$8.55 from $6.51-$8.79 driven by sharp cuts in China coal mining capex, something which was reinforced by Sany Heavy International’s pre-announcement. However, even with the 60% peak-to-trough decline in China coal CAPEX assumed by these estimates, the consensus 2013 estimates seem achievable, and with the stock trading at 11x trough P/E, I believe the risk-reward story is compelling. The investors will keenly listen to the company’s conference call on Feb. 27.
Manitowoc (NYSE: MTW): Sharp upside to 4Q EPS expectations and potential for visibility to improve
Most of the sell-side gives a buy rating on this stock and see a 29% upside to 4Q12 consensus EPS estimates, driven by sharp Crane margin upside due to the rising production rates and improved net pricing in the U.S. The US crane capex is expected to accelerate in 2013, driven by tight supply demand and improving crane rental pricing. Management is expected to introduce 2013 EPS guidance of $1.30.
Oshkosh (NYSE: OSK): Modest upside to near-term estimates, 2014 consensus aggressive
The company is expected to announce its 1Q13 earnings on Jan. 25. The consensus EPS and revenue estimates are 31 cents and $1.7 billion, respectively. However, chances are that the company will top the EPS estimates driven primarily by stronger pricing net of material costs. However, the 2014 estimates do not paint a good picture. The downside in the EPS is driven by peaking North America aerial platform capex and sharp cuts to US military vehicle CAPEX.
Terex (NYSE: TEX): Margin self-help and a crane segment upturn balanced by peaking Aerial Platform
An upside to the 4Q12 consensus EPS estimates is expected on better management execution on margin improvement. However, 2013 consensus estimates are a bit balanced as the Street expects US construction rental companies to cut capex on Terex’s high margin Aerial Work Platform business, offsetting improving US crane CAPEX.
4Q earnings should not bring much downside given that most of the bad news has already been factored into these stocks. In this scenario, any good news, like a reviving construction market, can help the stocks to appreciate.
SuperbAnalyst has no position in any stocks mentioned. The Motley Fool owns shares of Joy Global. 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!