The Zacks Manufacturing - Construction and Mining industry is well positioned 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. Indications of easing supply-chain issues raise optimism.
Players like Caterpillar Inc. CAT, Komatsu KMTUY, H&E Equipment Services HEES and Astec Industries, Inc. ASTE are likely to ride on the demand trends. These stocks are likely to benefit from efforts to bring technologically advanced products to the market. These players have also been focused on improving productivity and efficiency to counter cost pressures.
Industry Description
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: The Institute for Supply Management’s manufacturing index was 47.8% in February 2024, contracting for the 16th month in a row. The average for the 12 months ended February 2024 is 47.2%. Customers have been curbing their spending amid the ongoing uncertainty in the global economy and persisting inflationary trends. The New Orders Index was 49.2% in February, lower than 52.5% recorded in January due to seasonal factors. Notably, some industry players have reported that supply-chain issues have been gradually easing.
Energy Transition Trend, Construction Spending to Aid 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 equipped with the latest technology into the market.
Zacks Industry Rank Indicates Bright 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 #48, which places it at the top 19% of 250 Zacks industries.
Our research shows that the top 50% of the Zacks-ranked industries outperform 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 2%.
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 the Zacks S&P 500 composite and its sector over the past year.
Over this period, the industry has risen 30.1% compared with the sector’s growth of 15.4%. The Zacks S&P 500 composite has moved up 24.8%.
One-Year Price Performance
Industry's Current Valuation
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 11.06 compared with the S&P 500’s 12.31 and the Industrial Products sector’s trailing 12-month EV/EBITDA of 18.70. The charts below show this.
Enterprise Value/EBITDA (EV/EBITDA) F12M Ratio
Enterprise Value/EBITDA (EV/EBITDA) F12M Ratio
Over the last five years, the industry traded as high as 14.83 and as low as 7.05, with a median of 10.27.
4 Manufacturing - Construction & Mining Stocks to Watch
Komatsu: The company has been witnessing strong demand for mining and utility equipment, which, along with higher selling prices, has been supporting its revenues and segmental profits. In North America, demand is expected to remain 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 equipment operation. The company’s shares have gained 17.5% in the past three months.
Headquartered in Tokyo, Japan, Komatsu manufactures and sells construction, mining and utility equipment, and forest and industrial machinery worldwide. The Zacks Consensus Estimate for the company’s fiscal 2024 earnings has been revised upward by 3% over the past 60 days. The estimate indicates 11% year-over-year growth. The company has a trailing four-quarter earnings surprise of 31%, on average. KMTUY has an estimated long-term earnings growth rate of 9%. It currently flaunts a Zacks Rank #2 (Buy).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price & Consensus: KMTUY
H&E Equipment Services: The company reported record revenues of $1.47 billion in 2023. his was attributed to solid industry conditions and the company’s strong fleet growth and branch expansion. Owing to the higher interest rates and delays seen in equipment deliverability, customers now prefer renting equipment rather than owning it, which works in favor of HEES. Rental revenues grew 24.1% to $1.19 billion, crossing the $1 billion mark for the first time, and completed the year with an average margin of 52.1%. The company’s fleet investment through 2023 was a record $737 million and fleet original equipment cost was approximately $2.8 billion, or 18.3% higher year over year. The company added 14 branches in 2023, another record. HEES boasts the youngest fleet in the industry, with an average rental fleet age of 39.7 months as of Dec 31, 2023 (versus the industry’s 49.0 months). H&E also continues to grow its branch network through organic expansion and acquisitions, with 15 branches added in the past year. The company’s shares have gained 28% over the past three months.
Baton Rouge, LA-based H&E Equipment Services is one of the largest integrated equipment services companies in the United States. The Zacks Consensus Estimate for fiscal 2024 earnings indicates year-over-year growth of 5%. The consensus mark has moved up 3% over the past 60 days. HEES has a trailing four-quarter earnings surprise of 17.2%, on average and an estimated long-term earnings growth rate of 14.3%. The company currently carries a Zacks Rank #2.
Price & Consensus: HEES
Caterpillar: The company’s revenues and earnings have been growing year over year for 12 straight quarters, owing to its cost-saving actions, strong end-market demand and pricing actions. CAT ended 2023 with an impressive backlog of $27.5 billion, which 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. Its funding initiatives are 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 32.3% in the past three months.
Known for its iconic yellow machines, Caterpillar is the largest global construction and mining equipment manufacturer. The Zacks Consensus Estimate for CAT’s 2024 earnings indicates year-over-year growth of 0.14%. Earnings estimates have moved up 2% over the past 60 days. Caterpillar has a trailing four-quarter earnings surprise of 19.7%, on average. CAT has an estimated long-term earnings growth rate of 10%. The company currently carries a Zacks Rank #3.
Price & Consensus: CAT
Astec: The company is progressing well on its OneASTEC business model, with the strategic pillars of Simplify, Focus and Grow. This model has helped it mitigate the supply-chain challenges and logistic disruptions, thereby improving the overall operating performance. Astec continues to reduce organizational structure complexity and consolidate and rationalize its footprint. Its focus on innovation and global expansion through disciplined and strategic acquisitions will aid its growth. The company remains committed to the improvement of its part sales volume and the digital platform over the long term. ASTE shares have gained 28% over the past three months.
Chattanooga, TN-based Astec manufactures and sells equipment and components for road building and related construction activities worldwide. The Zacks Consensus Estimate for the company’s 2024 earnings has been revised upward by 0.3% in the past 60 days. The consensus estimate indicates year-over-year growth of 8.3%. ASTE carries a Zacks Rank #3 at present and has a trailing four-quarter average earnings surprise of around 11%.
Price & Consensus: ASTE
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