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Komatsu Offers More Than An Upswing In Mining

Stephen Simpson profile picture
Stephen Simpson


  • A recovery in mining and the ongoing integration of Joy Global is driving better than expected revenue and operating margins.
  • Komatsu remains deeply committed to automation, offering solutions to construction and mining customers to offset labor shortages and enhance operating efficiency.
  • Although recoveries in construction and mining are well underway, Komatsu still seems to offer worthwhile upside.

As often happens with companies that serve deeply cyclical end-markets, the timing and magnitude of the swings in Komatsu's (OTCPK:KMTUY) end-markets have defied expectations. While improving construction and mining markets have been part of the Komatsu story for a while now, the strength of the recoveries (especially in mining) has exceeded expectations, as has Komatsu's operating leverage and execution.

With major mining companies only starting to reinvest in equipment and plenty of room to grow in automation-driven investments, I believe Komatsu could still offer some upside from here. The shares aren't cheap on a free cash flow basis, but that's not all that unusual and a forward multiple in line with long-term averages suggests 10% more upside from here with the possibility of further upward revisions.

Mining Getting Better And Better

The strength of the mining recovery at Komatsu continues to surprise to the good, with overall revenue up 53% in the last quarter and 50% organic growth in the underground mining operations (the former Joy Global operations), and even stronger growth in original equipment sales. Profitability is also coming along nicely, with double-digit margins in the mining business and ongoing volume-driven leverage.

The strongest recovery market so far has been the coal market, with Indonesia and Australia particularly strong as China's appetite for commodities returns. Gold mining, too, has been strong in areas like the U.S. and Russia. Equipment orders for copper mining appear to be just starting to recover, while demand tied to iron ore remains sluggish.

All of that is fine and broadly consistent with what other players like Caterpillar (CAT), Atlas Copco (OTCPK:ATLKY), and FLSmidth (OTCPK:FLIDY) have been saying. Given the size of the copper market, I believe the signs of recovery here are very encouraging for Komatsu's near-term prospects. I'd

This article was written by

Stephen Simpson profile picture
Stephen Simpson is a freelance financial writer and investor.Spent close to 15 years on the Street (sell-side, buy-side, equities, bonds).

Analyst’s Disclosure: I/we 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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Comments (1)

giggerty profile picture
Komatsu's sales exposure to China averaged about 10% in the past 10 years, so it probably doesn't matter at all. That said, Morgan Stanley recently downgraded China's construction machinery, with falling PPP projects approval + falling leading indicators of property sales.

I believe the key question for Komatsu, other than US, is the developing market. So far, United Tractor sales data is supportive(Komatsu's retailor in Indonesia), but there seems to be no other data points to corroborate this belief.

Komatsu's is trading around 14.8x P/E, vs CAT at 17.8x and Hitachi at 17.1x- optically cheap, but the stock seems to have taken a dip recently.

Rio Tinto and BHP have both increased their capex spending since 2H17. Should be a positive read for Komatsu.
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