Shares of Japanese construction and mining equipment giant Komatsu (OTCPK:KMTUY) have been stronger over the past six months than I would have expected. While I thought the shares were worth around $17 to $19 back in January, I thought prolonged fretting about the health of China's construction sector and the global mining industry would have been a bigger headwind.
As it turned out, China has shown signs of a turnaround in construction equipment demand, and that is a significant swing factor for sentiment on Komatsu. What's more, there had been some signs of stability in some of the larger end-market materials for the company's mining business despite the company's repeated outlook that results likely wouldn't start improving (and even then, slowly) until 2017.
The biggest confidence-boosting move, though, may be the most recent. Last week, Komatsu announced an acquisition that had been long in the making - bidding nearly $4 billion to acquire American mining company Joy Global (NYSE:JOY). While an acquisition like this is certainly no guarantee that the mining sector demand will improve, it is a mark of confidence on the part of Komatsu management and it does open the door to meaningful product and financial synergy. If Joy Global's recovery can bring in $3 billion or more of revenue in 2020/2021 at double-digit margins, I believe this deal adds nearly $3/ADR in fair value, while the "no recovery" scenario would put about $2 of value at risk.
Komatsu Acting Like The Worst Is Over