September 23, 2023 - Zacks Equity Research discusses Caterpillar Inc. CAT, Komatsu KMTUY, Terex Corp. TEX, H&E Equipment Services HEES and Astec Industries, Inc. ASTE.

Industry: Construction and Mining

Link: https://www.zacks.com/commentary/2153040/5-top-stocks-in-the-thriving-construction-mining-equipment-industry

The Zacks Manufacturing - Construction and Mining industry is poised well to gain from the stepped-up infrastructure investment spending in the United States and solid demand from the mining sector, fueled by the energy transition trend. 

Players like Caterpillar Inc., Komatsu, Terex Corp., H&E Equipment Services and Astec Industries, Inc. are likely to ride on the demand trends. They are anticipated to benefit from their efforts to bring technologically advanced products to the market. They have also been focusing on improving productivity and efficiency to counter cost pressures. Indications of easing supply-chain issues increase optimism.

About the Industry

The Zacks Manufacturing - Construction and Mining industry comprises companies that manufacture and sell construction, mining and utility equipment. They support customers using machinery in the construction of commercial, institutional and residential buildings, and infrastructure projects. Their equipment is also utilized in underground mining, drilling and mineral processing, and surface mining to extract and haul copper, iron ore, coal, oil sands, aggregates, gold, and other minerals and ores. 

Their products are varied, including loaders, pavers, dozers, excavators, concrete mixer trucks, crushing, pulverizing, and screening equipment, tractors and cranes. Industry participants support oil and gas, power generation, marine, rail, and industrial applications through their reciprocating engines, generator sets, gas turbines and turbine-related services.

Trends Shaping the Future of the Manufacturing - Construction and Mining Industry

Easing Supply-Chain Disruptions Raise Hope: Per the Federal Reserve, industrial production was up 0.7% in July 2023 and 0.4% in August, following declines in the past two months. Manufacturing output inched up 0.1% in August — the second consecutive monthly gain. In August, the Institute for Supply Management's manufacturing index was 47.6%, higher than the 46.4% reported for July. Even though the U.S. manufacturing sector has been contracting for 10 months in a row, this uptick in the index indicates a slower rate of contraction. 

Amid the ongoing uncertainty in the global economy and persisting inflationary trends, customers have been curbing their spending. The manufacturing sector has also been bearing the brunt of supply-chain issues. On a positive note, some industry players have recently noted easing supply-chain issues and improving lead times. The Supplier Deliveries Index registered 48.6% growth in August — the highest in the past 11 months. As the situation returns to normalcy, diverse end-market demand will drive the industry's growth.

Demand Strength in Mining & Construction to Drive the Industry: The intensifying global focus on shifting from fossil fuels to zero emissions will require a large number of commodities, which, in turn, will support mining equipment demand in the years to come. The U.S. government's plans to increase investment in infrastructure construction, particularly in critical subsectors, such as transportation, water and sewerage, and telecommunications, should support demand in the coming years.

Higher Pricing, Cost Cuts to Boost Margins: The industry is facing input cost inflation, and transport and logistic costs. Industry players are focusing on pricing actions and efforts to improve productivity and efficiency. They are constantly implementing cost-reduction actions, which are likely to help sustain margins in this scenario. The companies are focused on streamlining their operations and realigning around high-growth key markets or customer segments to enhance their performances.

Investment in Digital Initiatives a Key Catalyst: Industry participants are investing in digital initiatives like AI, cloud computing, advanced analytics and robotics. Digital transformation aids organizations in boosting productivity and increasing efficiency, reliability and safety, thereby enriching customer satisfaction. With the pressing need to cut carbon emissions, companies worldwide are relying more on autonomous machinery. Thus, players in the industry are stepping up their research and technological capabilities to bring products into the market equipped with the latest technology.

Zacks Industry Rank Indicates Upbeat Prospects

The group's Zacks Industry Rank, 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, a seven-stock group within the broader Zacks Industrial Products sector, currently carries a Zacks Industry Rank #5, which places it at the top 2% of 250 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. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group's earnings growth potential. So far this year, the industry's earnings estimates for the current year have been revised upward by 30%.

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

Industry Versus Broader Market

The Manufacturing - Construction and Mining industry has outperformed its sector and the Zacks S&P 500 composite over the past year. Over this period, the industry has gained 57.1% compared with the sector's rise of 18%. The Zacks S&P 500 composite has rallied 14.6% in the same time frame.

Industry's Current Valuation

On the basis of the forward 12-month EV/EBITDA ratio, a commonly used multiple for valuing Manufacturing - Construction and Mining companies, we see that the industry is currently trading at 9.46 compared with the S&P 500's 11.14 and the Industrial Products sector's trailing 12-month EV/EBITDA of 14.27.

Over the last five years, the industry traded as high as 14.83 and as low as 7.04, the median being 10.20.

2 Stocks to Buy

Caterpillar: The company's revenues and earnings have been growing year over year for 10 straight quarters, owing to its cost-saving actions, strong end-market demand and pricing actions. Caterpillar ended the second quarter of 2023 with an impressive backlog of $30.7 billion, which was up $2.2 billion from the prior-year quarter. This will support the company's top line in the upcoming quarters. 

Caterpillar is anticipated to gain from strength in residential construction and non-residential construction in the United States. It is funding initiatives focused on areas of expanded offerings and services, and digital initiatives like e-commerce, sustainability and electrification, which will drive long-term growth. The stock has gained around 63% in a year, aided by these tailwinds.

Known for its iconic yellow machines, Caterpillar is the largest global construction and mining equipment manufacturer. The Zacks Consensus Estimate for CAT's 2023 earnings indicates year-over-year growth of 19.8%. Earnings estimates have moved up 10.5% over the past 60 days. CAT has a trailing four-quarter earnings surprise of 18.5%, on average. CAT has an estimated long-term earnings growth rate of 12%. The company currently sports a Zacks Rank #1 (Strong Buy).

You can see the complete list of today's Zacks #1 Rank stocks here.

Komatsu: The company has been witnessing strong demand for construction, mining and utility equipment, which, along with higher selling prices, has been supporting its revenues and segmental profits. In North America, demand should be steady in residential and non-residential construction markets, and road and traffic infrastructure. Its efforts to provide zero-emission solutions for its global customers will likely be a growth driver. Komatsu is working on expanding offerings for underground hard rock mining, and introducing products that offer automation and autonomous operation of equipment. The company's shares have gained 61% in the past year.