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5 Stocks to Watch as Construction & Mining Equipment Industry Mends

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The Zacks Manufacturing - Construction and Mining industry had been crippled by the COVID-19 pandemic as it disrupted global supply chains, causing factory closures, and thwarted consumer demand. However, the industry seems to be coming out of the woods, aided by the reopening of businesses as evident from the pick-up in manufacturing activity lately.

Players like Caterpillar Inc. (CAT - Free Report) , Komatsu Ltd. (KMTUY - Free Report) , Terex Corporation (TEX - Free Report) , Astec Industries Inc. (ASTE - Free Report) and H&E Equipment Services Inc. (HEES - Free Report) are poised to ride on this recovery. These companies are cutting down costs, improving efficiency and investing in digital initiatives to drive growth.

About the Industry

The Zacks Manufacturing - Construction and Mining industry comprises companies that manufacture and sell construction, mining, and utility equipment. The industry participants serve customers utilizing machinery in infrastructure, forestry, heavy and general construction, surface and underground mining operations. The industry participants also provide support to oil and gas, power generation, marine, rail and industrial applications.

What’s Shaping the Future of Manufacturing - Construction and Mining Industry

Recovering from Pandemic-Induced Slump: The industry, that had already been battling the unfavorable impacts of the prolonged U.S.-China trade war, suffered another blow from the COVID-19 pandemic last year. The industry had to face factory closures worldwide due to the restrictions imposed by different governments, supply-chain disruptions, low demand and logistic costs. Per the Federal Reserve, industrial production slumped 12.7% in April 2020 — marking the sharpest drop in the 101-year history of the index and manufacturing output fell 13.7% in the same month, the steepest decline on record. However, there has been a recovery since then, on gradual resumption of global economic activities and reopening of businesses. Notably, U.S. industrial production increased at an annual rate of 8.4% in the fourth quarter of 2020. Manufacturing output advanced 0.9% in December — its eighth consecutive monthly gain. Government stimulus packages, roll-out of vaccines instill optimism for the U.S. manufacturing sector. Further, manufacturing activity has been improving in other parts of the world as well.
Cost-Saving Actions to Drive Margins: The industry players have been taking every action to bolster their financial condition, conserve cash and optimize profitability amid the pandemic-induced uncertainty. The companies have been implementing cost-reduction actions, which include limiting discretionary spending, scaling back advertising spends and deferring certain discretionary capital expenditures. These are likely to help the industry in sustaining margins. Furthermore, these companies are making concerted efforts to streamline their operations and realign around high-growth key markets or customer segments to boost performance.

Improvement in Mining & Construction Instills Hope: Improving commodity prices will trigger the resumption of spending in the mining industry. This will boost the top-line performance of mining equipment manufacturers. In the United States, solid prospects of the housing market, backed by the rising needs for more work-at-home spaces and record-low mortgage rates, are expected to act as a tailwind for construction equipment manufacturers. Also, the government's plans to increase investment in infrastructure construction — particularly in critical subsectors such as transportation, water and sewerage, and telecommunications — will support demand in the coming years. In China, the government’s stimulus program focused on new infrastructure and urbanization will fuel demand for equipment.  

Investment in Digital Initiatives to be a Game Changer: The industry participants are investing in digital initiatives like AI, cloud computing, advanced analytics and robotics. This enables manufacturers to make rapid changes to operations for responding to market-based threats or opportunities. Digital transformation aids the organizations in boosting productivity, increasing efficiency, reliability and safety, thereby enhancing customer satisfaction. The companies also remain focused on bringing innovative products into the market equipped with the latest technology.

Zacks Industry Rank Indicates Bright Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright prospects in the near term. The Zacks Manufacturing - Construction and Mining industry, which is part of the broader Zacks Industrial Products Sector currently, carries a Zacks Industry Rank #89, which places it at the top 35% of 253 Zacks industries.

Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1. The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of solid earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. In the past six months, the industry’s earnings estimates for the current year have been revised upward by 14%.

Our proprietary Heat Map shows that the industry’s rank has remained in the top half over the past seven weeks.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Outperforms Sector & S&P 500

The Zacks Manufacturing - Construction and Mining industry has outperformed its own sector and the S&P 500 composite over the past year.

Over this period, the industry has gained 44.7% compared with the sector's growth of 26.0%. Meanwhile, the S&P 500 composite has rallied 18.7%.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month EV/EBITDA ratio, which is a commonly-used multiple for valuing Manufacturing - Construction and Mining companies, we see that the industry is currently trading at 11.16 compared with the S&P 500’s 17.25 and the Industrial Products sector’s trailing 12-month EV/EBITDA of 19.02. This is shown in the charts below.

Enterprise Value/EBITDA (EV/EBITDA) F12M Ratio

Enterprise Value/EBITDA (EV/EBITDA) F12M Ratio

Over the last five years, the industry has traded as high as 14.66 and as low as 7.08, with the median being at 10.56.

5 Manufacturing - Construction & Mining Stocks to Watch Out For

Komatsu: Headquartered in Tokyo, Japan, Komatsu manufactures and sells construction, mining, and utility equipment; and forest and industrial machinery worldwide.

Komatsu continues to strive to strengthen the Autonomous Haulage System (AHS) in sync with its growth strategies. The company has increased the total number of AHS trucks in operation to 297 units as of Dec 31, 2020. Komatsu also continues to accelerate the speed of achieving digital transformation at construction workplaces through SMARTCONSTRUCTION, which will provide it a competitive edge. The company will also benefit from its cost-reduction efforts. Further, higher iron, copper and gold prices will translate into improving orders for mining machinery and help offset the lower demand from coal-mining machinery.

The Zacks Consensus Estimate for the company’s current-year earnings has been revised upward 34.6% over the past 90 days. The company has a trailing four-quarter earnings surprise of 32.9%, on an average. Komatsu has an estimated long-term earnings growth rate of 10%. The stock has gained 48% in the past six months and currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price & Consensus: KMTUY

H&E Equipment Services: This Baton Rouge, LA-based company is one of the largest integrated equipment services companies in the United States. The company will gain on its acquisition strategy that focuses on identifying and acquiring rental companies to complement its existing business, broaden geographic footprint, and increase density in existing markets. Efforts to grow its Parts and Services operations will bear fruit as it is a relatively stable high-margin revenue source. It also aids in developing customer relationships, attract new customers and maintain a high-quality rental fleet. The company continues to grow its fleet and the fleet age as of Sep 30, 2020 was 40 months compared with the industry average of 50.7 months. This provides an edge over its competitors. Pick-up in spending in the construction industry will translate into higher revenues for the company.

At present, the stock carries a Zacks Rank of 2. The Zacks Consensus Estimate for this year’s earnings has been revised 22.4% upward in the past 90 days. The company has a trailing four-quarter earnings surprise of 81.5%, on an average. The company’s shares have appreciated 56.7% in the past six months.

Price & Consensus: HEES

Caterpillar: Known for its iconic yellow machines, Deerfield, IL-based Caterpillar is the largest global manufacturer of construction and mining equipment. Caterpillar is anticipated to gain on strong demand in China, pick-up in manufacturing activity, strength in residential construction in the United States, solid construction demand in Brazil as well as better mining fundamentals.  Its incessant focus on cost control will keep boosting margins. Caterpillar continues to focus on customers and future by consistently investing in digital capabilities, connecting assets and jobsites, and developing the next generation of more productive and efficient products. The company plans to fund initiatives that drive stellar long-term growth focused on areas of expanded offerings and services, and digital initiatives like e-commerce.

The Zacks Consensus Estimate for the company’s ongoing-year earnings has moved up 9% over the past 90 days. The company has a trailing four-quarter earnings surprise of 27.2%, on average. Notably, Caterpillar has an estimated long-term earnings growth rate of 12%. The Zacks Ranked #3 (Hold) stock has gained 26% in the past six months.

Price & Consensus: CAT

Terex: The Westport, CT-based company is a global manufacturer of aerial work platforms, materials processing machinery and cranes. Terex is poised to gain on its “Execute, Innovate, Grow” strategy that will focus on driving cash flow and profitability, and continue to innovate in products and technology. It continues to invest in innovative products and expansion of manufacturing facilities to ensure growth, while remaining focused on maintaining strong liquidity and cash position. The company’s efforts to rightsize its cost structure will help boost margins. To deliver industry-leading customer services, it is providing distribution partners easy-to-use digital tools, which will aid them in catering to their customers more efficiently. This will provide Terex a competitive edge and accelerate parts growth.

The Zacks Consensus Estimate for the company’s earnings for the ongoing year has moved 54% north over the past 90 days. This Zacks #3 Ranked stock has surged 100% in the past six months.

Price & Consensus: TEX

Astec Industries: Chattanooga, TN-based company manufactures and sells equipment and components for the road building, aggregate processing, geothermal, water, oil and gas, and wood processing industries in the United States and internationally.

Astec is making steady progress toward its strategy — Simplify, Focus and Grow — which will continue to drive earnings. Its acquisitions of CON-E-CO and BMH will significantly strengthen the Infrastructure Solutions group portfolio and provide customers with access to the most robust line of concrete products in the infrastructure industry. Management’s cost-saving initiatives and focus on operational excellence to drive efficiencies will aid margins. The company also recently acquired Grathwol Automation that supports its technology leadership vision to deliver value-added solutions.

The Zacks Consensus Estimate for the company’s 2020 earnings has been revised 9% upward in 90 days’ time. The company has a trailing four-quarter earnings surprise of a whopping 156%, on average. This Zacks Ranked #3 stock has rallied 21% in the past six months.

Price & Consensus: ASTE


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