A Machine Stock That's an Earnings Machine

08/31/2010 4:36 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

Oddly enough, on a day, August 31, when investors are again feeling nervous about growth, machinery stocks are showing relative strength. Among the standouts: Caterpillar (NYSE: CAT), Joy Global (Nasdaq: JOYG), Bucyrus (Nasdaq: BUCY), and Deere (NYSE: DE).

This group has been through a day much like this not so long ago. On August 12, the same stocks were up—except for Caterpillar, which was down slightly, even though it was the catalyst for the sector’s strong showing that day.

That morning, the company announced that it would triple the production capacity of its US excavator lines and add 500 more employees with the opening of a new plant in Texas. Caterpillar said that plant would be operating in mid-2012.

Now, of course, Caterpillar’s optimism about its business may be completely misguided or wildly early, but it echoes news from other machinery companies: If your customers are other companies with long lead times between breaking ground on a mine or an airport or a communications network and having them go into use, then you’re actually seeing an increase in business.

That’s been the story at Cummins (NYSE: CMI) and Intel (Nasdaq: INTC).

On Tuesday, August 31, the catalyst appears to be earnings from Joy Global due before the opening Wednesday. Analysts think the company will beat modest expectations for the current quarter and then predict growth for the fourth quarter, which is typically the strongest of the year.

One stock that isn’t in Tuesday’s list of leaders but that will be a major beneficiary of this trend is Komatsu (OTC: KMTUY), the world’s second-largest construction-equipment maker. Like all other Japanese exporters, Komatsu has seen its shares hammered by the ever-climbing yen. A stronger yen threatens to price Japanese products out of markets from cars to cameras. Its ADRs closed down around 2% Tuesday, above $20. (It’s down about 6% from the beginning of the year.)

But if the yen ever turns around—and it will if and only if the US economy shows signs that it’s headed towards economic recovery rather than a new recession—I think Komatsu (will) become a very interesting pick in the machinery sector.

In July, the company announced plans to double production in the fiscal year that ends in March 2011 to meet demand from China and Indonesia. Production will climb to 85,000 building and mining machines, compared with 44,000 in the previous fiscal year, executive officer Masahiro Uegaki told Bloomberg last month. That projection was about 60% higher than the company’s prediction in April.

In July, the company raised its forecast for first-half profits—that’s the period from March 31 through the end of September—by 41%.

Typically, for a depressed cyclical stock coming off a bottom, Komatsu trades at an horrendous 55x trailing-12-month earnings, but at just 12x projected earnings for the 2012 fiscal year.

If the turnaround Komatsu is forecasting actually materializes, this is one cheap stock. I’m adding it to Jim’s Watch List today.

Full disclosure: I don’t own shares of any company mentioned in this post in my personal portfolio.

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