Pulse Check: Heavy Equipment on the Move

Includes: AGCO, CAT, CNH, DE, NAV
by: Research Recap

Caterpillar Inc. (NYSE:CAT)’s stronger-than-expected quarterly profits signal a recovery in the heavy equipment industry, led by Latin America and Asia. The company’s first-quarter net profit was $233 million, compared to last year’s $112 million loss.

The volume is beginning to come back,” Longbow Securities analyst Eli Lustgarten told Reuters. “But it’s all outside the United States.” Edward Jones analyst Jeff Windau said Caterpillar is reaping the benefits of the cost-cutting it did last year, and the company’s results definitely show the economy is improving.

Standard & Poor’s analyst Michael Jaffe maintained his “buy” rating for Caterpillar and raised his target price from $72 to $88. “Prospects continue to brighten, in our view, on robust business growth in Asia/Pacific and Latin America, a positive outlook in energy and mining markets served by CAT, and very low inventories in the U.S. and Europe,” he wrote in a statement (BusinessWeek). Standard & Poor’s also raised its credit ratings outlook on Caterpillar.

Zacks Investment Research noted that Caterpillar “is well positioned to take advantage of the growing need for global infrastructural development,” but also warned of difficulties as a result of unpopular product and pension expenses. Zacks reiterated a “neutral” recommendation for Caterpillar.

The agricultural equipment sector has seen recent developments that are overall encouraging. Medill reports that North American sales of row crop tractor sales increased 5.2 percent and four-wheel drive tractors rose 41.7 percent, compared to the previous year. In addition, commodity prices are higher, enabling farmers to feel comfortable investing in new equipment.

In a prescient report in March, Jefferies & Co. Inc.’s Stephen Volkmann wrote, “We expect that when demand recovers in 2010 and beyond, one of the few levers farmers will have to enable higher yields will be reinvestment in farm equipment.” He also noted, “We believe farm markets are weathering the economic storm relatively better than many other industrial sub sectors, and that tight supply/demand indicates that crop prices and farmer income could rebound quickly.”

Volkmann reiterated his “buy” rating on Deere & Co. (NYSE:DE) and increased his price target to $65, indicating in his research note that the farm industry is on the verge of an equipment reinvestment cycle. Based on historic data, Deere stock on the upswing of a reinvestment upturn could be in the $85-$90 range, he wrote.

Heiko Ihle, a Gabelli & Company Inc. analyst sees encouraging developments in the sector. “The numbers are getting better. Overall, commodity prices are coming up. Ihle maintained his “buy” rating for Deere & Co. and raised his annual earnings estimate to $3.10. He called Deere “an attractive way” to ride increases in global food demand.

Robert W. Baird & Co. Inc. analyst Robert McCarthy raised his target price to $64 from $53, while Sterne, Agee & Leach Inc. analyst Lawrence De Maria increased his stock price target to $66 from $52 and upgraded his rating to “buy,” (Medill)

Deere does face a potential problem with low inventory driving its customers to competitors, such as AGCO, (NYSE:AG) according to BusinessWeek.“Deere is likely a little ahead [in managing its stocks],” says UBS analyst Henry Kirn, because it has “focused on taking inventories out of the channel and becoming leaner over time.”

However, AGCO today reported net sales of $1.3 billion for the first quarter of 2010, a decrease of 13.3% compared from $1.5 billion for the first quarter of 2009. CEO Martin Richenhagen said “In Brazil, market demand was near record levels, and we were very pleased with our sales and margin performance. In Western Europe, industry conditions continued to soften throughout the first quarter and remained below the strong levels that existed in early 2009. Industry demand in North America has stabilized, with the professional producer segment showing the most strength.”

Standard & Poor’s upgraded AGCO’s debt to investment grade in March. Earlier this month J.P. Morgan upgraded AGCO from Underweight to Neutral and boosted its price target from $30 to $39.

Last week CNH Global NV (NYSE:CNH), which makes the Case brand, reported encouraging first quarter earnings. The Amsterdam-based agricultural and construction equipment unit of Fiat Spa reported $0.16 in earnings per share, compared to an EPS loss of -$0.53 a year ago (24/7WallSt).

Another industry player, Navistar International Corp.(NAV) increased its guidance for 2010, though the significant boost in earning is likely more a result of its military contracts than machinery manufacturing trends. Navistar expects $198 million to $234 million in revenue, or $2.75–$3.25 per share (Zacks).

Avram J. Davis