Makers of big industrial equipment and machinery have had an incredible rally this year.
The strongest gains have been among companies that are likely to see recovery later in the economic cycle – the makers of cranes and commercial heating/cooling systems are examples – the likes of Ingersoll-Rand (IR), whose shares fell nearly 3% Tuesday; or Manitowoc (MTW) and Terex (TEX), whose shares fell 6% apiece.
But consider Caterpillar (CAT), whose shares have rallied about 20% so far this year. The company beat expectations for earnings when it reported most recently, and has said it has a strong backlog. Caterpillar stock, changing hands at $105.93, fell nearly 4% Tuesday as headlines swirled about slowing global economic growth.
Analysts at Baird Equity Research have a $135 price target, based on a multiple of about 11 times peak earnings of $16 per share in 2015.
Cat is betting on a second-half 2012 recovery in China’s construction market, which may prove too optimistic. Ditto for its equipment expectations in the U.S. this year.
According to a lengthy report on the industry out Tuesday from Baird analysts Robert F. McCarthy, Mircea Dobre and Sean P. Poe, Caterpillar is looking for:
- U.S. housing starts of 700,000 vs 607,000 in 2011, which compares to other company forecasts of 660,000-680,000 units.
- U.S. non-residential construction growth of 5%, while Eaton (ETN) forecasts around 2%.
- Strong replacement growth for U.S. equipment rental fleets.
Caterpillar’s diversity of end markets may smooth things out. Beyond residential and nonresidential construction, those customers include mining, power generation, heavy industry, oil and gas, marine, road construction and forestry.
