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The direct correlation between increasing economic activities and the prospects of the machinery industry evokes in us a confidence in the industry right on the heels of anticipated economic growth worldwide.

Recovery, though gradual, from the 2008 global crisis has raised demand for industrial products and has in turn boosted the need for new/advanced machinery. The major end-markets for the machinery industry include agriculture, construction, mining and energy industries, among others.

The world economy will likely grow by 3.6% in 2014, according to the International Monetary Fund’s (IMF) World Economic Outlook, published in Oct 2013. Growth in advanced economies and emerging and developing countries are projected at 2.0% and 5.1% for 2014, respectively.

The world economic growth projection was a slight moderation from what was predicted by the IMF in Jul 2013 due primarily to weak demand and slower-than-anticipated growth in emerging markets. Admittedly obstacles still persist but the overall growth picture may not materially deteriorate or deviate from the IMF’s Oct 2013 forecast.

A brief discussion on the future prospects of the machinery industry among different nations has been provided below.

Prospects in the United States

One can have a fair idea of the growth prospects for the Machinery industry, one of the most attractive industries in the United States, from the performances in the recent past. In Nov 2013, industrial production in the United States edged up 1.1% from the previous month while on a yearly basis it recorded growth of 3.2%. Manufacturing output increased 0.6%.

According to the U.S. Census Bureau report, published in Jan 2014, machinery shipments in the 11 months ended Nov 2013 increased 3.0% year over year while new machinery orders grew 7.3%. Machinery order backlog was up 2.3%. Shipments for construction and industrial machinery rose by 3.4% and 12.3%, respectively, while that for mining equipment and farm machinery dipped 5.6% and 2.0%, respectively.

Export demand has been considered crucial for the future growth prospects of the U.S. machinery industry. According to a report published by the Association of Equipment Manufacturers (AEM), the United States’ construction equipment exports fell 21% in the first half of 2013 while agricultural equipment exports registered a 9.5% decline.

In the years to come, the U.S. is expected to witness growing international demand for technologically advanced construction and agriculture equipment. In this respect, it is worth mentioning that the U.S.-Russia trade bill will boost U.S. exports of construction equipment to Russia, the 11th largest export market for U.S. construction equipment. The IMF expects the United States to grow 2.6% in 2014.

Unemployment still seems to be a disturbing factor. As per the latest report by the Bureau of

Labor Statistics, job addition in Dec 2013 was well below expectation at 74,000 and below 241,000 additions made in Nov 2013. Average monthly job additions for 2013 were at 182,000 compared with 183,000 in 2012. However, the unemployment rate came in at 6.7% versus 7% in Nov 2013. This latest report has put a question on whether the Federal Reserve will opt for a second round of $10 billion cut in its quantitative easing program from $75 billion to $65 billion.

Despite the disturbing labor market statistics, there is a glimmer of hope emanating from evidences of strengthening demand in the housing as well as durable goods markets. Conditions in the credit markets are also improving slowly.

Japanese Markets

The recovery seen in the Japanese economy in the past few quarters was primarily triggered by economic policies undertaken by the government, recovery in capital spending and higher machinery orders from private sector and manufacturing industries. The country is now on the verge of implementing a sales tax hike of 3% in Apr 2014 with a view to curb its ballooning debt levels. This measure combined with the stimulus promised, if successfully implemented, is expected to drive growth in the medium to long term.

The latest report by Japan’s Cabinet Office shows that total machinery order in the month of Oct 2013 fell 4.6% from its previous month. However, the main highlight of this report was a 0.6% increase in private-sector machinery order (excluding volatile orders from ships and electric power companies) driven by an 11.5% increase in orders from non-manufacturing industries. This increase has sparked hopes for a hike in capital investments by companies, anticipated to be a key driver for the country’s growth.

Also, in a release in Dec 2013, Japan’s Cabinet Office approved a forecast of a 3.3% increase in industrial production in fiscal 2014, an increase from an estimated 2.4% for fiscal 2013. The Japanese economy is projected to grow 1.2% in 2014, according to the IMF.

Emerging Nations

China: The Chinese government is focused on rapid urbanization and has planned major investments for this. Domestic demand is strong in the country while exports are also on the rise. Further, efforts in improving trade relations with Brazil, Russia and other countries are expected to boost growth.

In 2013, the world’s second largest economy recorded a 7.6% year-over-year increase in its foreign trades. Exports were up 7.9% while imports grew 7.3%. Trades with the European Union increased 2.1% and with the U.S. were up by 7.5%. Industrial production in Nov 2013 grew 10% over the year-ago month.

Growth in 2014 is expected to be driven by investments and recovery in demand from the U.S. and Europe. According to the IMF, the Chinese economy is projected to grow 7.3% in 2014.

India: Industrial production in India in Nov 2013 fell 2.1% year over year due primarily to weak domestic consumption. According to the IMF, the country is projected to grow 5.1% in 2014. Rise in domestic and external demand, expectation of policy improvements and better monsoon conditions are the prime drivers of the country’s growth.

Brazil: The country is fast growing as the favourable destination for foreign direct investments. With a population of over 200 million — according to data released by the Brazilian Institute of Geography and Statistics (IBGE) — the country’s hunger for better infrastructural and agricultural requirements are on the rise. Industrial production in Nov 2013 has grown 0.4% from the year-ago period.

Industries like tourism, steel and electricity, among others offer promising growth especially as the country is gearing up to host the upcoming 2014 FIFA World Cup and 2016 Olympics. In the third quarter of 2013, the country’s gross domestic product (GDP) grew 2.2% year over year.

The Brazilian government, under its Growth Acceleration Program or PAC – phase II, has major investments planned for the development of ports, railroads, airports, wind farms and roads. Other areas of focus are sanitation, energy and logistics. Also, to boost its export businesses with other countries, roughly 24 Free Trade Zones (FTZ) are being set up across 20 Brazilian states.

According to the IMF, the country is expected to grow 2.5% in 2014.

South Africa: The country is making progress and a sequential increase of 0.7% was recorded in its GDP in the third quarter of 2013. In Nov 2013, South Africa’s industrial production increased 0.3% from the comparable period a year ago.

The government is focused on improving its mining, manufacturing chemicals, and agricultural sectors. Huge public investments, amounting to R4 trillion, have been announced under the infrastructure development programs. Also, the country is keen on expanding its trade relations with its largest exporter cum importer country, China.

According to the IMF, South Africa is expected to grow 2.9% in 2014.

Other Major Players

Korea’s industrial production in Nov 2013 decreased 0.3% from the previous month while it increased 1.2% from Nov 2012, according to the latest data released by Statistics Korea. The country seems to be recovering slowly from the impacts of weak exports caused by uncertain economic conditions in the Eurozone.

Thailand’s industrial production declined 10.6% in Nov 2013 from the year-ago period, as reported by the Office of Industrial Economics. The country is making huge investments, both domestic and foreign, to improve its service and public utilities, metal products industries as well as machinery and transport equipment related industries. To further enhance its exports, the government is laying emphasis on infrastructural developments and free trade agreements. However, the continuing political unrest, if unresolved for long, will hamper growth prospects of all industries in the country.

Eurozone — Showing Signs of Improvement

The Eurozone’s industrial production (excluding construction) in Nov 2013 grew 1.8% from Oct 2013 while it increased 3.0% year over year, according to data released by the Eurostat in Jan 2014. On a monthly basis, industrial production in Nov 2013 increased 11.7% in Ireland, 6.4% in Sweden, 3.8% in Malta and 2.5% in the Netherlands.

According to the VDMA Machine Makers’ Association, German machine tool orders in Nov 2013 increased 7.0% year over year. Domestic orders were down 1% while international orders grew 12%.

Important Players in the Machinery Industry

Deere & Company’s (DE - Analyst Report) fiscal 2013 (ended Oct 31, 2013) results were impressive. For the fiscal year, equipment sales rose roughly 4%, with price realization contributing 3%. This agricultural and forestry equipment provider is expanding globally to leverage benefits from the growing global farm industry.

Management anticipates equipment sales to decrease 3% year over year in fiscal year 2014. Net earnings for the year are projected to be approximately $3.3 billion.

Caterpillar Inc. (CAT - Analyst Report) posted a 19% decline in Machinery and Power Systems sales in the third quarter of 2013. For 2013, the company expects revenue to be approximately $55 billion, down from the $56–$58 billion range expected earlier due primarily to weak demand for mining equipment. The company is slated to report its fourth quarter results on Jan 27, 2014.

Other top players in the agricultural, construction and mining industry include AGCO Corporation (AGCO - Analyst Report), Toro Co. (TTC - Snapshot Report), Terex Corp. (TEX - Analyst Report) and Kubota Corporation (KUB), among others.

Prime companies operating in machinery industries other than agricultural, construction and mining are Rockwell Automation Inc. (ROK - Analyst Report), Illinois Tool Works, Inc. (ITW - Analyst Report) and Manitowoc Company, Inc. (MTW - Analyst Report), among others.

Zacks Industry Rank

Within the Zacks Industry classification, Machinery is broadly grouped into the Industrial Products sector, one of the 16 broad Zacks sectors.

More than 260 industries are ranked in the 16 Zacks sectors based on the earnings outlook for the constituent companies in each industry. To learn more visit: About Zacks Industry Rank.

As a guideline, industries with Zacks Industry Rank of #88 and lower are considered to have a positive outlook, those between #89 and #176 have a neutral outlook while the ones with #177 and higher possess a negative outlook.

The machinery industry is further sub-divided into five industries at the expanded level: machine tools and related products, machinery – construction and mining, machinery – electrical, machinery – farm and machinery – general industries.

The Zacks Industry Rank for machine tools and related products is #94, machinery – construction and mining is #95, machinery – electrical is #97, machinery – farm is #98 and machinery – general industries is #99. Looking at the Zacks Industry Rank of all the machinery related industries, it can be deduced that the sub segments of the machinery industries have a neutral outlook.

Earnings Trend of the Sector

Considering the performance of 4% of the companies within the Industrial Products sector, it can be concluded that until Jan 7, 2014, the results were good on a year-over-year basis. Earnings in the fourth quarter grew 8.8% and revenues went up by 7.9%. Both earnings and revenue beat ratios (percentage of companies coming out with positive surprises) were 100%.

The trend seems positive for the Industrial Products sector, as earnings in the fourth quarter of 2013 are anticipated to grow 2.1% as against 1.3% growth recorded for the third quarter. Further increase is predicted with growth rates reaching 8.6% in 2014 and 12.2% in 2015.

On the top line, a wider fall of 2.9% in revenues is projected for the fourth quarter versus a 1.2% decline recorded in the third quarter. The downtrend is predicted to worsen during 2014, with some relief expected in the final quarter of the year. Overall, a meagre growth of 0.7% is expected in 2014 while growth of 3.8% is anticipated in 2015.

In view of all the Zacks sectors combined, total earnings growth rate in the fourth quarter of 2013 is anticipated to be 6.3%. Revenue growth is predicted at 1.5% with a modest gain anticipated in margins.

For more information about earnings for this sector and others, please read our 'Earnings Trends' report.

OPPORTUNITIES

Fiscal government expenditures play a counter-cyclical role curbing the ill effects of slower economic development and a tight credit market. China’s structural stimulus package, government spending on social welfare, construction of low-cost housing, and completion of infrastructure projects on agriculture, forestry and water resources received special attention.

Also, the U.S. Congress had a stimulus package designed in 2009 that had money flowing into infrastructure spending. Also, The American Energy & Infrastructure Jobs Act (H.R. 7) will boost spending in infrastructure projects. Approximately $260 billion will be allocated to fund roads, bridges and highway projects over five years.

Russia, which became a World Trade Organization (WTO) member in 2012, will open the gates for companies worldwide to meet the growing needs for modernizing the agricultural, transport and infrastructure sectors of the economy.

WEAKNESSES

We remain wary of rising raw material costs of some of the major players of the machinery industry. Steel prices along with energy, especially coal and fuel prices, remain the prime causes of concern.

Research and development costs are also on the rise for machine makers as they seek to manufacture more sophisticated and technologically advanced machinery. Availability of funds remains a stumbling block as some major nations are still struggling to bring stability to their own economies.

Favorable commodity prices are a boon, although government policies affecting prices along with export and import policies and trade relations with other countries impact the machinery industry at large.

To Conclude: Prospects are Bright

Albeit economic uncertainties still persist in many parts of the world, still efforts on implementing better policies, growing trade relations and a burgeoning population are prime catalysts for driving demand for better infrastructure, modernized methods of agriculture and mining/manufacturing methods. All these will eventually boost demand for technologically advanced equipment in these industries. Moreover, looking ahead, the growth path widens for the emerging and developing nations, which will inevitably be attractive destinations for machine makers worldwide.

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