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The global machinery industry is betting big on a global economic recovery after the financial meltdown of 2008. According to the IMF, the world's economy is expected to grow 3.3% in 2013 and 4% in 2014. This will lead to an increase in industrial activities, which will boost demand for new machines. Three machinery companies are capitalizing on growth in industries like construction and agriculture. I have discussed them in brief, analyzing any investment opportunity in these stocks.

Rise and fall in demand from regional geographic divisions

During the third quarter ended July 2013, Deere (DE), the world's leading agricultural equipment manufacturer, posted 8% year-over-year growth in agriculture and turf division sales. This growth is mainly owed to increasing demand for agricultural equipment from Brazil. Total tractor sales there have increased 17% year over year in July this year, while combine sales were up by 46% year over year in July 2013.

Agriculture equipment sales growth in Brazil should continue since the Brazilian government approved spending of $58 billion in the agriculture and livestock industry this year. This will increase crop output, which is expected to grow 15% year-over-year in 2013. Continued sales growth in Brazil is expected to drive Deere's agricultural and turf division revenue, which the analysts expect to increase from $27 billion in 2012 to $29 billion in 2013.

However, Deere expects lower demand for agricultural equipment in the North American market, which contributed 54% of the company's net sales in 2012. Unusual wet conditions delayed new crop planting in the region, while surplus production of crops like corn, soy beans and wheat led to lowering their prices. This eventually resulted in lower sales as farmers will likely delay purchase of new agriculture equipment. These factors are expected to drop North America's revenue growth from 20% year-over-year in 2012 to just 7% for this year.

Revenue growth expected from crane and food service divisions

Manitowoc's (MTW) crane segment posted 7.5% year-over-year revenue growth amounting to $656 million in the second quarter. Three orders from the Bauma trade show are expected to bring $100 million in revenue, while growth in the U.S. construction sector has spurred increased demand for cranes. The U.S. market accounted for approximately 50% of Manitowoc's total revenue in 2012.

According to a McGraw-Hill 2013 construction report, it is expected that around $483.7 billion will be spent this year in the U.S. on new construction, up 6% year-over-year. Growth in the construction sector is expected to bring new orders to Manitowoc.

The company is also positive about its food-service-equipment division, which posted revenue growth of 1% year-over-year and reported $390 million in revenue in the second quarter. This growth is expected to rise in the second half of 2013 due to a growing U.S. restaurant industry, which contributes 70% of the total segment revenue. The U.S. restaurant industry is expected to grow 3.8% year-over-year, reaching $660.5 billion in revenue in 2013.

Inventory decline by dealers puts strain on the company's revenue

During the second quarter, Caterpillar (CAT) reported a revenue decline of 16% year-over-year to $14.6 billion. Amid low equipment demand, dealers chose to sell off their existing inventory rather than purchasing new equipment from the company. Dealers' inventory fell by $1 billion in the second quarter, with another $2 billion drop expected for the remainder of 2013.

Moreover, mining companies are spending less on equipment, reducing demand and affecting Caterpillar's sales. It is expected to decline 10% year-over-year in 2013 and 20% year-over-year in 2014. Analysts expect the company's revenue to fall from $65.88 billion in 2012 to around $57 billion in 2013.

Caterpillar has a history of giving high cash returns to shareholders. In July, it announced that it will repurchase stock worth $1 billion in the third quarter - part of the $2.7 billion remaining in the $7.5 billion repurchase program it announced in 2007. Apart from share repurchases, the company also announced a second-quarter dividend of $0.60 per share, a 15% increase year-over-year. High cash reserves of $6.11 billion, up 19.8% year-over-year in the second quarter, are supporting the share buyback and high dividends.

Please also read: Does This Caterpillar Have 9 Lives To Survive The Industry Downturn?

Conclusion

As growth in the restaurant, construction and agriculture sectors drives demand for their products, Manitowoc and Deere are expecting higher revenue.

Deere's robust growth in the Brazilian market is expected to offset its fall in the North American market. We recommend a buy for these two stocks.

Caterpillar's revenue prospects don't look bright because of dealer inventory reductions and the spending cuts in the mining industry. Thus, we recommend a hold for this stock.

Source: With Recovering Economy, Which Machinery Stocks Should You Buy?