Prudential Securities Wednesday started coverage of the capital goods and machinery industries with a “neutral” rating, noting a lack of major improvement in the North American trucking market and a downturn in residential construction.
Analyst Igor Maryasis does sound somewhat bullish on Caterpillar and Deere, however, saying CAT will be a major beneficiary of accelerating growth in its four major end markets – global infrastructure, energy, mining, and global non-residential construction – which make up about 60 percent of the company’s total revenue.
“We believe Caterpillar’s global presence should more than offset exposure to North American heavy-duty trucks and U.S. residential construction, which combined account for about 10-15 percent of its total revenue,” Maryasis said.
The analyst added that there’s room for operating margin improvement as the company shifts its focus to execution improvements and closer ties with suppliers over the next 3-5 years, away from product-line expansion.
“As the largest remanufacturer in the world in rail, construction and mining, CAT is likely to benefit from more than $2 trillion-$3 trillion spent on new machinery over the past 3-4 years,” Maryasis said.
On Deere, Maryasis said a growing global appetite for ag products – with demand in many cases outstripping supply – present several growth opportunities for the company.
“We believe Deere’s expertise on improving farming efficiency in both mature and emerging markets will prove to be a key differentiating factor driving higher share gains worldwide,” he said. The company should also benefit from global price increases for key agricultural products expected for next year.
The analyst is less optimistic about Ingersoll-Rand, Eaton, Paccar, Cummins, and Navistar.
He says upside in shares of Paccar is limited because of the lack if visibility in the North American heavy-duty truck market into next year, noting the delay in the truck-market recovery caused by macro economic issues like lower gross domestic product and higher fuel costs. He did say that Paccar’s global footprint and financial services and parts businesses should help mitigate the impact from the 35-40 percent expected decline in North American heavy-duty truck demand.
As for Ingersoll-Rand, Maryasis said the company’s current product and end-market mix are unlikely to provide enough overseas exposure to offset the decline in North American residential construction and consumer durables markets, which he believes make up 20 percent of the company’s total sales. He also said Ingersoll’s current R&D spending of 1.5 percent of sales is the lowest among its peers and might be inadequate for staying competitive and growing share in global markets.
Maryasis started coverage of Caterpillar and Deere shares with an “overweight” rating, started Cummins, Illinois Tool Works, and Eaton at “neutral,” and started Ingersoll, Navistar and Paccar at “underweight.”
