Japan’s Rebuilding Favors Caterpillar

05/19/2011 12:28 pm EST


Michael Brush

Columnist, MSN Money

The maker of heavy machinery should profit handsomely from the colossal reconstruction effort, writes Michael Brush of MSN Money.

Rebuilding Japan after the Tohoku earthquake and tsunami will cost more than $300 billion, the Japanese government estimates.

Eventually, the companies applying their skills and providing much-needed equipment to rebuild Japan will make money. And investors in the companies that profit from all that work will be rewarded.

The estimated $309 billion price tag on the recovery effort is a big number, particularly in a still-slow economy. "If it trickles down, as we all know it is going to have to, I think this is going to be a major opportunity for a lot of our industrial companies here in the US," says Jeff Duncan, the CEO of Duncan Financial Management in St. Louis.

Japan will obviously need a lot of heavy-construction and earth-moving equipment. As the largest heavy-equipment manufacturer in the world, Caterpillar (CAT) seems like a natural to sell much of the gear for the job—but how much is hard to say.

Its chief rival in heavy equipment, Komatsu (KMTUY), is based in Japan. And so is another major player in the space, Hitachi (HIT). There's likely going to be a natural bias in Japan toward buying from domestic suppliers like these.

Still, "we think Caterpillar could see some opportunity at the expense of its Japanese peers," says Morningstar analyst Adam Fleck. There are three reasons for optimism about Caterpillar's opportunities.

  • First, the company provides top-rate service and support, which is key to construction job-site managers. They don't like any downtime, because even small delays can sideline a cascade of workers. Caterpillar's reputation here has helped it carve out $1.2 billion in annual revenue in Japan. It's there in a big way, which means it can get more business.
  • Second, Caterpillar competitor Komatsu has a plant near the site of the damaged Fukushima nuclear power plants. Shutdowns there and elsewhere in the country could limit the ability of Komatsu—and Hitachi—to meet potential demand. Caterpillar says its plants in Japan have not been damaged, and it's a natural to pick up any slack. And if Komatsu and Hitachi divert construction equipment sales from elsewhere in the world, Caterpillar can make up the difference in those locations, too.
  • Third, Caterpillar is a major supplier of power generators. "Given the fact that they have had such a disruption in the power grid, large back-up power generation is going to be required," says Eric Marshall, a director of research for Hodges Capital Management. "Capacity is already running tight due to demand from emerging markets and mining, and oil and gas sectors," he says. Goldman Sachs analyst Jerry Revich agrees that Caterpillar could see "meaningful demand" for power generators in Japan. Emerson (EMR) could see a knock-on effect here, in that it is a major supplier of alternators used by Caterpillar to build generators.

Beyond Japan, Caterpillar was already enjoying strong demand for its equipment because of the rebound in global economic growth and demand from high-octane emerging market countries that are rapidly building infrastructure, including China and India.

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