Invest In The Machinery Sector And See Your Money Grow

Includes: CAT, MTW, TEX
by: Robinson Roacho

The machinery sector has potential for capital appreciation as global economies continue to recover. Although Caterpillar (NYSE:CAT) and Deere come to mind as the biggest machinery giants, Manitowoc (NYSE:MTW) and Terex (NYSE:TEX) are two smaller companies that should bring capital appreciation to their investors.

The big dog

Caterpillar, a $54.9 billion by market capitalization value, manufactures construction and resource equipment and power systems. The company trades with a price-to-earnings ratio of 11.3, compared to the industry average of 11.8. The company reported decreasing revenues and net income for the first three months of 2013. Its revenue declined 18% to $13.2 billion on a year-over-year basis, and its net income declined by 45% to $880 million.

China is going through the process of urbanization in several regions. Although it is expected to continue, it may be at slower pace. In any way, Caterpillar's construction equipment should continue to bring steady revenues from China, as its sales improve over time.

The company expects revenues from its resource industries (mining) section to decline due to lower commodity prices. However, several analysts believe that the prices of metals have been pushed low enough that they are ready to rebound. If metal prices gain appreciation, the demand for mining equipment will increase bringing favorable results to Caterpillar. Investors should closely track metal prices for possible rebounds as Caterpillar will be co-benefited from the move.

Further, the company is reducing its workforce in an effort to reduce costs of operation. The profit margin should increase as the number of workers was reduced by 11,400 to 141,000 by the end of the quarter.

Lastly, the company is reinitiating its stock repurchase program. The cash flow from operations increased by $1 billion to $1.42 billion, and its free cash flow increased to $192 million, from an outflow of $799 billion. The company is in an excellent position to buy back shares especially since the price is trading near its 52-week low levels.

Overall, the company offers an excellent investment prospectus. Even investors commit into long positions, they have to continuously reevaluate general economic conditions. Further, if metal prices being to rebound, the demand for Caterpillar's mining equipment will increase significantly.

The underdogs

Although Caterpillar is the big dog whose presence has been consolidated over the years, you should not underestimate these puppies. They will mature in the future, and your investment will grow exponentially along with them.

Manitowoc's net sales increased to $898 million for the first quarter of 2013 from $851 million last year, according to its 1Q 2013 earnings report. Its net earnings swung to a profit of $8.1 million, or $0.09 per share, from a loss of $2.2 million, or $0.01. The company had a grand finale for the first quarter because its net cash increased from $2.2 million to $27.9 million on a year-over-year basis. Its cash and cash equivalents at the end of the period increased to $101 million from $70 million.

One drawback of the company is the sizable amount of debt that its balance sheet reflects. The company's net debt ascends to approximately $1.9 billion, or a debt/equity ratio of 3.2. However, the company should not have issues with its debt repayment due to higher revenue and increasing net profits.

I expect the company to continue performing well because the demand for its construction equipment should remain strong as the commercial building market improves. Recently, Bigge, one of the country's top crane rental companies purchased 58 cranes from Manitowoc in the last 12 months. Further, Tower Mark, a Hong Kong based rental company has ordered 30 new Manitowoc cranes. This illustrates the potential that this company has to sell its products as global conditions continue to improve. Additionally, Manitowoc completed the acquisition of Potain SA, a tower crane subsidiary of Legris Industries. Manitowoc will increase its presence in profitable European and Asian markets by providing a variety of lifting solutions.

Terex also manufactures cranes, and construction. According to Terex Corporation's most recent quarterly earnings report, its revenue declined 5% to $1.7 billion for the three months ending in March 31 from $1.8 billion for the same period last year. However, due to lower operational costs, its net income remained unchanged at $20.9 million, or $0.18 per share. The company carries a debt of $2 billion which was reduced by $200 million over the last year. Its debt/equity ratio is approximately 1.1. Although it may seem sizable, its debt/equity ratio is the lowest of the companies herein described.

The management of Terex is exemplary. The company's gross margin has expanded since 2011.

The exposure of Terex to Indian markets negatively impacted its material handling and port solutions segment, and its revenue declined significantly. However, it was partially offset by a good performance from its cranes and materials processing sectors. Terex's demand for cranes should remain strong as world economies recover and commercial construction picks up. Finally, the company was awarded 29 separate contracts with the Department of the Defense worth $951 million. This illustrates the point that Terex is a company you want to have in your growth portfolio.

In conclusion ...

The overall recovery of global economies will strengthen the demand for these companies' products. All of them possess solid balance sheets and aggressive expansion strategies. For these reasons, they may be bought as a basket to gain exposure to the machinery sector.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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