Zacks.com releases the latest Analyst Interview. Today’s interview is with senior analyst Mario Ricchio, who discusses Ingersoll Rand (NYSE: IR), Joy Global (Nasdaq: JOYG) and Caterpillar (NYSE: CAT).
A synopsis of today’s Analyst Interview is presented below. The full article can be read at http://at.zacks.com/?id=2678.
What effect, if any, do you expect the global economy to have on the machinery group as a whole?
The strength in the global economy is the biggest factor behind our positive view on the group. Machine orders are expected to increase at a double-digit rate for industrial, mining and energy-related equipment. Foreign companies and governments alike are flush with cash from the multi-year surge in commodity prices. They are reinvesting the flow of funds back into infrastructure, new construction and mining projects that pull more resources out of the ground.
So, in effect, what were seeing is a commodity boom feeding into general construction spending globally. When we look at our forecast, machinery companies’ sales on average are expected to increase more than 10% in Europe, 20% from the Middle East, 20% in Latin America and at least 10% in Asia, with overwhelming strength coming from China. We expect the strength in International sales to offset a slowdown in the U.S. market. It’s truly a bifurcated global economy.
How does this bifurcated global economy affect your outlook on Ingersoll Rand’s sale of Bobcat?
Well, it makes a lot of sense. Ingersoll Rand (NYSE: IR) has spent the last couple years transitioning from a heavy machinery group into a diversified industrials company. The sale of Bobcat is another step along the way of realizing that goal. We had expected a $4 billion sales tag, so we were surprised South Korea's Doosan Infracor paid almost $5 billion at this point in the U. S residential construction cycle.
The company will be left with three business platforms -- global climate control, industrial and security markets—that carry a higher level of earnings predictability and a lower level of market cyclicality. More importantly, the company increases its international sales exposure and leaves the headwind of U.S housing behind it.
If you had to pick one or two Buys in machinery, what would they be, and why?
We still like shares of Joy Global (Nasdaq: JOYG). The company recently lowered profit guidance on account of a weak U.S. coal market. However, we see the weakness persisting for only a few more quarters. Producers have already started to restrict output to bring supply back in line with demand. As coal pricing begins to firm, we expect a rebound in original equipment orders to positively impact JOYG’s bottom line.
The company is more than a coal story though; it’s also a play on the global commodity boom. The demand for mining equipment remains so strong that the order book is full for the next 12 months. Supply constraints have become the issue. The company is working to bring capacity online, and as it does, we would expect an acceleration of sales growth.
How would you advise investors interested in diversifying into machinery stocks?
We would look at the industry players on a company-by-company basis. Growth rates will depend on the respective end markets served and the level of international exposure. We suggest underweighting companies such as Caterpillar (NYSE: CAT) that are heavily exposed to the U.S. residential construction market, or companies beating earnings solely off of share buybacks. Instead, we would look at companies with strong overseas exposure to construction and infrastructure, and domestically in road building and mining-machinery.
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Terry Ruffolo, 312-265-9213