CNH CNH Industrial NV

Recovery – or the extent of recovery – from the 2008 global crisis is still fairly modest. Achievement on this front, as witnessed from the equity market improvements, has been quite remarkable but the pursuit to reach the pre-crisis level is still on.

According to the International Monetary Fund’s (IMF) World Economic Outlook published in Jul 2013, the world economy will likely grow by 3.1% in 2013 and 3.8% in 2014. Growth in advanced economies and emerging and developing countries are projected at 1.2% and 5.0% in 2013 while the same for 2014 are estimated at 2.1% and 5.4%, respectively.

These projections represent a slight decline to what was predicted by the IMF in April 2013 due primarily to weak domestic demand, slower than anticipated growth in emerging markets and prolonged Eurozone crisis. No doubt obstacles still persist; nevertheless, the overall growth picture may not materially deteriorate or deviate from the IMF’s July 2013 forecast.

Talking about the Machinery industry, increasing economic activities spur demand for industrial products, which in turn also boost the need for new/advanced machinery. Based on this direct correlation, anticipation of improvement in global economic growth is a positive sign for the future prospects of the machinery industry.

The major end-markets for the machinery industry include agriculture, construction, mining and energy industries, among others. A brief discussion with a glimpse of the future prospects of the machinery industry among different nations has been provided below:

Machinery Industry Prospects in the United States

The IMF expects the United States to grow 1.7% in 2013 as against 1.9% predicted earlier and roughly 2.7% in 2014. High unemployment still seems to be a disturbing factor, though there is a glimmer of hope emanating from evidences of strengthening demands in the housing as well as durable goods markets. Conditions in the credit markets are also improving slowly.

The Machinery industry is one of the most attractive industries in the United States. Growth prospects for this industry can be deduced from the indicators to the performances in the recent past. In the second quarter of 2013 (Apr-Jun), industrial production in the United States rose by an annual rate of 0.6% while the same in the month of Aug rose by 2.7% as compared with the year-ago period. Manufacturing output decreased 0.2% in the quarter.

According to the US Census Bureau report published in Aug 2013, machinery shipments in the first half 2013 increased 4.1% year over year while new machinery orders grew 4.5%. However, machinery order backlog at the end of the first two quarters were down 10.0%. Shipments for construction and industrial machinery rose by 27.2% and 10.4%, respectively, while that for mining equipment and farm machinery dipped 6.5% and 7.3%, respectively.

Exports demand has been considered crucial for the future growth prospects of the US machinery industry. According to a report published by the Association of Equipment Manufacturers (AEM), the United States’ construction equipment exports fell 21% in the first half 2013 while agricultural equipment exports registered a 9.5% decline.

In years to come, international demand for technologically advanced construction and agriculture equipment are expected to improve for the United States. In this respect, it is worth mentioning that the US-Russia trade bill will boost U.S. exports of construction equipment to Russia, the 11th largest export market for U.S. construction equipment.

Japanese Markets

According to the latest report published by Japan’s Cabinet Office, on a monthly basis, core machinery orders in Jul 2013 grew by 4.4%. Recovery in capital spending and higher orders from private sector, manufacturing industries and governments were the main drivers of the growth.

Also, overseas demand for machinery grew 1.4% in July, indicating prospects of a solid demand growth in the months ahead. Industrial production in the month grew 1.8% over the year-ago quarter, as reported by the Ministry of Economy, Trade & Industry.

According to the IMF, the Japanese economy is projected to grow 2.0% in 2013 and 1.2% in 2014.

Emerging Nations

China and India, the two major emerging/developing nations, are expected to show signs of tangible growth in the years ahead. According to the IMF, the Chinese economy is projected to grow 7.8% in 2013 and 7.7% in 2014.

The Chinese government is focused on rapid urbanization, with major investments planned towards this end. Domestic demand is strong in the country while exports are also on the rise. Further, efforts on improving trade relations with Brazil, Russia and others are expected to boost growth.

Industrial production in India revived in the month of July 2013 increasing 2.6% compared with the year-ago period attributable to increase of 3% in the manufacturing sector and 5.2% in the power generation sector. According to the IMF, the country is projected to grow 5.6% in 2013 and 6.3% in 2014 fuelled largely by rise in domestic and external demand, expectation of policy improvements and better monsoon conditions.

Brazil is fast growing as a favorable destination for foreign direct investments. With a population of over 200 million people — according to the data released by the Brazilian Institute of Geography and Statistics (IBGE) — the country’s hunger for better infrastructural and agricultural requirements are fast growing. Industrial production in the month of Jul 2013 has grown 2.0% compared with the year-ago period.

Industries like tourism, steel, electricity, among others offer promising growth especially as the country is gearing up to host the upcoming 2014 Soccer World Cup and 2016 Olympics sporting events. In the second quarter 2013, the country’s Gross Domestic Product (GDP) grew 3.3% compared with the year-ago quarter while a sequential growth of 1.5% was registered.

The Brazilian government, under its Growth Acceleration Program or PAC – phase II, has major investments planned for development of ports, railroads, airports, wind farms and roads. Other areas of focus are sanitation, energy, logistics etc. Also, to boost its export businesses with other countries, roughly 24 Free Trade Zones (FTZ) are being set up across 20 Brazilian states. The first, the Pecem free trade zone, in the state of Ceara, began operations recently.

According to the IMF, the country is expected to grow 2.5% in 2013 and 3.2% in 2014.

South Africa is also making progress and a sequential increase of 3% was recorded in the country’s Gross Domestic Product in the second quarter of 2013. In July 2013, South Africa’s industrial production increased 5.4% as compared with the comparable period a year ago.

The government is focused on improving its mining, manufacturing chemicals, and agricultural sectors. Huge public investments have been announced under the infrastructure development programs. Also, the country is keen on expanding its trade relations with its largest exporter cum importer country, China.

According to the IMF, South Africa is expected to grow 2.0% in 2013 and 2.9% in 2014.

Other Major Players

Korea’s industrial production in the month of July 2013 decreased 0.1% compared with the previous month, according to the latest data released by Statistics Korea. Despite the decline, the country seems to be recovering slowly from the impacts of weak exports due to global uncertainties, especially the Eurozone crisis.

Thailand’s industrial production declined 4.5% in the month of Jul 2013 compared with the year-ago period, as reported by the Office of Industrial Economics. The country is making huge investments, both domestic and foreign, to improve its service and public utilities, metal products industries as well as machinery and transport equipment related industries. To further enhance its exports, the government is laying emphasis on infrastructural developments and free trade agreements.

Eurozone – Still a Hurdle

The Eurozone exhibited meager sequential recovery of 0.3% in the second quarter 2013, according to the data released by the Eurostat in Aug 2013. Industrial production (excluding construction), on a monthly basis, in the Eurozone fell by 1.5% in Jul 2013.

On a year-over-year basis, industrial production in July 2013 dropped 2.1%, including 8.2% fall in Greece, 7.9% in Ireland and 7.7% in Malta, among others.

According to the VDMA Machine Makers’ Association, German machine tool orders in Jul 2013 plummeted 3.0% year over year. Domestic orders grew by 10% while international orders were down by 9.0%.

Important Players of the Machinery Industry

Deere & Company’s (DE) fiscal third quarter 2013 (ended Jul 31, 2013) results were impressive. For the quarter, equipment sales rose roughly 4%, with price realization contributing 3%. The agricultural and forestry equipment provider is expanding globally to leverage benefits from the growing global farm industry.

Management anticipates equipment sales to decrease 5% year over year in the fiscal fourth quarter but increase by the same magnitude in the fiscal 2013. Net earnings for the year are projected to be approximately $3.45 billion, up from $3.3 billion expected earlier.

Caterpillar Inc. (CAT) posted a 17% decline in Machinery and Power Systems sales in the second quarter of 2013. For the year 2013, the company expects revenue to range within the $56-$58 billion range as against $57-$61 billion expected earlier due primarily to the expectations of weak demand for mining equipment and expected reduction in dealers inventory.

Italy-based CNH Global NV (CNH) posted a year-over-year increase of 9% or 10% on a constant currency basis in its equipment sales in the second quarter 2013. Equipment sales comprised of 83% agricultural sales and 17% construction equipment sales. For 2013, management anticipates agricultural equipment unit volume in the market to increase 5% but for construction equipment unit volume to be flat to down 5%.

Other top players in the agricultural, construction and mining industry include: AGCO Corporation (AGCO), Toro Co. (TTC), Terex Corp. (TEX) and Kubota Corporation (KUB), among others.

Prime companies operating in machinery industries other than agricultural, construction and mining, are Rockwell Automation Inc. (ROK), Illinois Tool Works, Inc. (ITW) and Manitowoc Company, Inc. (MTW), among others.

Zacks Industry Rank

Within the Zacks Industry classification, Machinery is broadly grouped into the Industrial Products sector, one of the 16 broad Zacks sectors.

More than 260 industries are ranked in the 16 Zacks sectors based on the earnings outlook for the constituent companies in each industry. To learn more visit: About Zacks Industry Rank.

As a guideline, industries with Zacks Industry Rank of #88 and lower are considered to have a positive outlook, those between #89 and #176 have a neutral outlook while the ones with #177 and higher possess a negative outlook.

Machinery industry is further sub-divided into five industries at the expanded level: machine tools and related products, machinery – construction and mining, machinery – electrical, machinery – farm and machinery – general industries.

The Zacks Industry Rank for machine tools and related products is #94, machinery – construction and mining is #95, machinery – electrical is #97, machinery – farm is #98 and machinery – general industries is #99. Looking at the Zacks Industry Rank of all the machinery related industries, it can be deduced that the sub segments of the Machinery industries have a neutral outlook.

Earnings Trend of the Sector

Considering results of all the companies within the Industrial Products sector, it can be seen that results for this Zacks sector in the second quarter 2013 were disappointing on a year over year basis. Earnings fell 4.5% while revenue managed just a 0.6% increase. Earnings and revenue beat ratios (percentage of companies coming out with positive surprises) were 66.7% and 37.5%, respectively in the quarter.

However, results exhibited a positive trend when compared with the 8.9% earnings fall and 0.5% revenue decline reported in the first quarter 2013.

In a view of all the Zacks sectors combined, second quarter 2013 results were dominated by the finance sector which drove the overall earnings growth to 2.5% year over year. Excluding finance, earnings in the quarter registered a 2.9% fall. Sectors that dragged the results were Oil/Energy, Basic Materials, Technology, Industrial Products, Conglomerates, Medical and Consumer Staples.

Going forward, the trend seems positive for the Industrial Products sector, as the earnings decline is anticipated to further contract to 1% in the third quarter 2013 while earnings growth of 15.8% is expected in the fourth quarter. For 2013 and 2014, earnings growth of 1.6% and 10.8%, respectively are expected.

Revenue growth is likely to remain same in the third quarter but to increase slightly in the fourth quarter. For 2013 and 2014, revenue is anticipated to grow 0.8% and 3.3%, respectively.

For more information about earnings for this sector and others, please read our 'Earnings Trends' report.

OPPORTUNITIES

Fiscal government expenditures play a counter-cyclical role curbing the ill effects of slower economic developments and a tight credit market. China’s structural stimulus package, government spending on social welfare, construction of low-cost housing, completion of infrastructure projects on agriculture, forestry and water resources received special attention.

Also, the U.S. Congress had a stimulus package designed in 2009 that had money flowing into infrastructure spending. Also, The American Energy & Infrastructure Jobs Act (H.R. 7) will boost spending in the infrastructure projects. Approximately $260 billion will be allocated to fund roads, bridges and highway projects over five years.

Russia, which became the World Trade Organization (WTO) member in 2012, will open the gates for companies worldwide to benefit from the growing needs for modernizing the agricultural, transport and infrastructure sectors of the economy.

WEAKNESSES

We remain wary of the rising raw material costs of some of the major players of the machinery industry. Steel prices along with energy, especially coal and fuel prices, remain the prime causes of concern.

Research and development costs are on the rise for machine makers as they seek to manufacture more sophisticated and technologically advanced machinery. Availability of funds remains a stumbling block as some major nations are still struggling to bring stability to their own economies.

Favorable commodity prices are a boon, although government policies affecting prices along with export and import policies and trade relations with other countries impact the machinery industry.

Conclusion: Prospects Bright

Despite the prevailing global uncertainties, rising needs of better infrastructure, modernized methods of agriculture and growing complexity of mining/manufacturing methods will boost demand for technologically advanced equipment in these industries. Moreover, looking ahead, the growth path widens for the emerging and developing nations, which will inevitably be attractive destinations for machine makers worldwide.
 
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