Early-Stage Recoveries And Rebuilt Optimism Supporting Komatsu

It looks as though the worst has passed in both the mining and heavy construction equipment markets. With that, both Komatsu (OTCPK:KMTUY) and Caterpillar (NYSE:CAT) have been stronger, with the former up about 25% from my last article on the company and not really having given investors that buy-on-the-pullback opportunity I was hoping for. Komatsu has seen consistently better demand for its mining machinery in recent quarters, and although operating hours have been choppy around the world, the situation is quite a bit healthier than it has been over the last two to three years.

Komatsu shares seem to be pricing in a pretty healthy recovery. I don't really have a problem with that, but it does lead me to wonder how much upside remains. Construction equipment demand seems a little muted, though progress on a huge infrastructure stimulus bill in the U.S. could significantly improve the outlook in the United States. With mining, companies are getting back to capex spending again, but thus far, they have been proceeding cautiously. My base-case assumptions for Komatsu haven't changed all that much, and I think the company could deliver high single-digit revenue growth over the next five years with meaningful improvements in cash flow. Priced to deliver a high single-digit return, Komatsu is still arguably a worthwhile idea to consider for a GARP portfolio.

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Early-Stage Recoveries And Rebuilt Optimism Supporting Komatsu