2 Construction & Mining Equipment Stocks to Watch Despite Industry Challenges - November 12, 2024 - Zacks.com

The Zacks Manufacturing - Construction and Mining industry faces challenges due to the ongoing contraction in manufacturing activities and declining orders due to low customer spending. Elevated input costs pose concerns. Increased infrastructure investment in the United States and demand from the mining sector, driven by the energy transition trend, are expected to buoy the industry. Caterpillar Inc. (CAT Quick QuoteCAT - Free Report) and Komatsu (KMTUY Quick QuoteKMTUY - Free Report) are poised to benefit from these trends. These companies’ emphasis on introducing technologically advanced products, productivity and efficiency enhancements will aid growth.

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, 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.

Prolonged Weakness in Manufacturing Activity is Concerning: The Institute for Supply Management’s Manufacturing index has been in the contraction territory for 16 consecutive months till February 2024. While March saw a slight uptick to 50.3%, the index returned to the contraction territory with a 49.2% reading in April. It declined further and was 46.5% in October — the lowest so far in 2024. The average for the 12 months ended October 2024 is 47.9%. The New Orders index has also contracted for the seventh consecutive month in October. The index has not delivered consistent growth since the end of its 24-month expansion streak in May 2022. Companies continue to manage outputs cautiously amid ongoing weakness in orders. The industry has also been affected by supply-chain issues. Deliveries of suppliers to manufacturing organizations were slower in October for the fourth consecutive month.Energy Transition Trend, Construction Spending to Aid 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 and other actions 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.Investments in Digital Initiatives Act as 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 equipped with the latest technology into the market.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dim 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 #247, which places it at the bottom 1% of 249 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.Before we present a few stocks that you may want to consider for your portfolio, let us look at the industry’s recent stock-market performance and valuation picture.

The Manufacturing - Construction and Mining industry has outperformed the Zacks S&P 500 composite and its sector over the past year.Over this period, the industry has risen 59.8% compared with the sector’s growth of 37.5%. The Zacks S&P 500 composite has moved up 36.3%.

The forward 12-month EV/EBITDA ratio, a commonly used multiple for valuing Manufacturing, Construction and Mining companies, shows that the industry is currently trading at 11.48 compared with the S&P 500’s 14.48 and the Industrial Products sector’s forward 12-month EV/EBITDA of 21.24. The charts below show this.

Over the last five years, the industry traded as high as 14.37 and as low as 7.36, with a median of 10.29.

Caterpillar: The company ended the third quarter of 2024 with an impressive backlog of $28.7 billion, which will support its top line in the upcoming quarters. Solid long-term demand prospects, backed by infrastructure spending and energy-transition trends, should help it maintain an upbeat performance. In the Energy and Transportation segment, strong order rates in most applications are expected to support revenues. As technology companies establish data centers globally to support their generative AI applications, the company is witnessing robust order levels for reciprocating engines for data centers. It is planning to double its output with a multi-year capital investment. Also, CAT has been seeing growth in aftermarket parts and service-related revenues, which generate high margins. The company is on track to double its service revenues from $14 billion in 2016 to $28 billion in 2026. The CAT stock has gained 64% in the past year.

The Zacks Consensus Estimate for CAT’s 2024 earnings indicates year-over-year growth of 2.3%. Caterpillar has a trailing four-quarter earnings surprise of 6.14%, on average. CAT has an estimated long-term earnings growth rate of 9.3%. The company currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Komatsu: The company is strengthening its underground hard rock mining equipment business through an enhanced lineup, developing the latest mining methods, and strategic acquisitions. To this end, Komatsu recently acquired GHH Group GmbH, a manufacturer of underground mining equipment, and added Load-Haul Dump and underground mining dump trucks to its product offerings. KMTUY’s efforts to provide zero-emission solutions for its global customers will likely be another growth driver. It also recently showcased a variety of products and solutions for automation, remote control and electrification of mining equipment to improve safety and productivity at mine sites, which will aid growth. The company’s shares have gained 12.3% in the past year.

The Zacks Consensus Estimate for Komatsu’s fiscal 2024 earnings has been revised upward by 2% over the past 60 days. KMTUY has an estimated long-term earnings growth rate of 1.1%. It currently carries a Zacks Rank #3.