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China Data Lifts Construction Equipment Stocks

TEX CAT MTW JOY

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Machinery-construction and mining stocks, Manitowoc Company, Inc. (MTW - Analyst Report), Caterpillar Inc. (CAT - Analyst Report), Terex Corp. (TEX - Analyst Report) and Joy Global, Inc. (JOY - Analyst Report) surged on Wednesday thanks to China's January trade data, which showed acceleration despite expectations to the contrary. This has eased fears of a slowdown in the world's second-largest economy. The market also found support in the optimistic economic outlook from the new Federal Reserve Chair Janet Yellen.

In January, imports to the country rose 10% year over year and exports rose 10.6%. China imported record levels of crude oil, iron ore and copper to start off the year. China is the largest consumer of iron ore, and iron imports rose 18%, a record 86.84 million metric tons over December. It surpassed the previous record set in November by 11.6% and was up 32% year over year.

Despite weak demand and prices for steel, China's ore stockpiles also rose to near record highs. The rise in imports has defied all expectation of a fall given the growing uncertainty about demand in the country's steel sector.

China’s January trade numbers have turned the tables on the analysts, coming as it is after not-so-inspiring other data, including purchasing-managers indexes, which had pointed towards a lull in the manufacturing sector. The market had thus prepared itself for further signs of weakness in China.

Furthermore, the country’s biggest annual holiday, the Lunar New Year festival was expected to be a drag on January's trade as factories and offices close shop for long periods before and after the festivities. The positive data is thus mind baffling and has ignited speculation regarding its authenticity. The figures may suspiciously be inflated by fake trade transactions.

Even so, let us have a close look at some of the gainers in the sector which had otherwise been affected by low demand in construction and mining, particularly in China.

Manitowoc Company

Manitowoc shares attained a peak of $29.11 yesterday during intraday trade, close to its 52-week high of $29.29 attained on Jan 31, before settling down at $27.81 at the end of day, gaining 2%.  

Manitowoc’s upbeat fourth quarter earnings release on Jan 30 worked like a magic wand for its share price, catapulting it to a 52-week high on Jan 3, levels not seen in so many years. Manitowoc’s fourth-quarter earnings per share increased 74% to 47 cents, helped by sound performance at the Foodservice segment, successful introduction of new products as well as the company’s cost control exercises. The bottom line beat the Zacks Consensus Estimate of 33 cents.

For 2014, Manitowoc expects modest top-line growth and high single-digit improvement in operating margins at the Crane segment. Crane utilization and rental rates continue to improve with rising demand. Going forward, demand from the wind sector as well as from oil and gas markets is expected to grow.

Manitowoc is upbeat about its new product launches at ConExpo, the premier construction-equipment trade show that is slated to be held in Mar 2014. This could be a catalyst for the Crane segment. A turnaround in the construction sector will also boost Crane sales.
 
Foodservice revenues are expected to rise in mid single digits leading to high-teens gain in Foodservice margins. The segment will benefit from new manufacturing facilities, restructuring initiatives and new products.

The Manitowoc Company, Inc. provides crawler cranes, tower cranes, and mobile cranes for the heavy construction industry and also manufactures commercial foodservice equipment.

Manitowoc currently sports a Zacks Rank #1 (Strong Buy).

Terex

Terex shares gained 3.44% yesterday to close at $43.88 after hitting a 52-week high of $44.25. Terex shares have gained ever since it reported impressive third quarter numbers on Oct 30 and subsequently found support on its decision to sell its truck business and initiate the dividend.

Terex is expected to report fourth quarter earnings results on Feb 18. The Zacks Consensus Estimate for the fourth quarter currently stands at 49 cents, reflecting year-over-year growth of 160%. The consensus for 2013 is at $2.14, up an estimated 17%.
 
In the third quarter, Terex reported adjusted earnings of 77 cents per share, a 24% improvement year over year, mainly due to reduced interest expense and a lower effective tax rate. The results also surpassed the Zacks Consensus Estimate of 58 cents. Terex ended the quarter with a backlog of $1.8 billion, a 7% year-over-year rise.

Terex is expected to gain from replacement demand in the Aerial Work Platforms segment, improvement in its Port business and restructuring in the Materials Handling & Port Solutions segment. Terex has decided to sell its truck business to transition into a lifting and material handling solutions company.

This divestiture will enable it to focus on cranes, aerial lifts and telehandlers. It sits well with the company’s strategy of streamlining its construction business by selling certain underperforming product lines. The initiation of the quarterly dividend of 5 cents per share and share repurchases will also improve investor sentiment.

Terex is a global equipment manufacturer catering to the construction, infrastructure, and surface mining industries.

Terex currently retains a Zacks Rank #2 (Buy).

Caterpillar

Caterpillar shares gained 1.27% to close at $96.17 yesterday, near its 52-week high of $96.68 attained on Feb 14 last year.

So far it has been a good year for the mining and equipment behemoth starting with its fourth quarter earnings beat which translated into a 6% jump in its share price on Jan 27. The share price further found support as news of renewed investments in Northern Ireland and share repurchases came in. It has almost been a year since the company hit the $90+ mark. Caterpillar came across a rough patch for most of last year with struggling growth rates.

Despite reporting a 10% decline in its fourth quarter sales to $14.4 billion, Caterpillar delivered a 48% rise in its earnings to $1.54 per share, marking the first year-over-year earnings improvement in 2013. In spite of challenging macroeconomic conditions and reduced demand for its mining equipment, cost reduction was the key to Caterpillar’s success in Q4. Despite a tumultuous year, Caterpillar continued to deliver strong cash flow and reward shareholders though dividend hikes and share repurchases.

Caterpillar expects revenues in 2014 to be flat with 2013 levels, up or down 5%. Excluding restructuring costs, earnings per share are expected at $5.85. Construction Industries and Power Systems are expected to deliver sales growth on the heels of better economic growth. However, sales in Resource Industries will continue to be challenging, as mining companies keep cutting their pockets with lower capital expenditures for 2014.

The company might finally be seeing light at the end a dark tunnel. It is all set to reap the benefits of its cost reduction activities, namely, shifting production between certain facilities, rationalization of its smaller facilities and workforce reductions. Also, improving economic conditions, especially in China, and recovery in the construction sector could be catalysts for Caterpillar.

Peoria, IL-based Caterpillar Inc. is the manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. The company is one of the few leading U.S. companies in an industry that competes globally from a principally domestic manufacturing base.

Caterpillar currently retains a Zacks Rank #3 (Hold).

Joy Global

Shares of Joy Global rose 1.15% to close at $56.21 yesterday.

On Dec 11, 2013, Joy Global reported adjusted earnings of $1.11 per share in the fourth quarter of fiscal 2013, compared with $2.10 per share in the year-ago quarter. Earnings came in line with the Zacks Consensus Estimate. The lackluster results at Joy Global contrast poorly with its peers discussed above.

Fiscal 2013 has been a difficult year for Joy Global. Depleting backlogs and declining orders from some of the key markets pulled back results. Of late, Joy Global’s management has implemented several strategies to optimize its cost structure and realign production capacity to cope with sluggish customer orders. The company is pushing its overall inventory and working capital efficiency.

Moreover, Joy Global is positioned to relocate production capacity to low-cost regions like China, Poland and South Africa. Joy Global is also trying to cut operational expenses through restructuring, reducing head count and closing some low-margin facilities. All these initiatives are expected to generate savings of $75 million in fiscal 2014.
 
Joy Global Inc., headquartered in Milwaukee, WI, manufactures surface and underground mining equipment for extraction of coal, copper, iron ore, oil sands, gold and other mineral resources.

Joy Global currently holds a Zacks Rank #3 (Hold).

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