Komatsu Acting Like The Worst Is Over

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.

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Komatsu Acting Like The Worst Is Over

Seeking Alpha: Komatsu Lacking A Spark

There's really not much good news to celebrate among the makers of heavy machinery for construction and mining. Joy Global (NYSE:JOY) has been pummeled over the last year, and Komatsu (OTCPK:KMTUY), Caterpillar (NYSE:CAT), Sany, Hitachi Construction (OTCPK:HTCMY), Sandvik (OTCPK:SDVKY), and Atlas Copco (OTCPK:ATLKY) all pretty much occupy the same real estate in the down 20%-30% range. In fact, most of these companies' shares have pretty closely tracked the CRB Index down over the past 12 months.

I continue to think that Komatsu is a strong company within the heavy machinery sector, but it rarely makes a lot of sense to buy the best house on the block when the entire neighborhood is in flames. To that end, it's hard to look past the ongoing declines in machine utilization in Japan, China, and North America and the grim outlook for mining capital spending. While Komatsu shares do seem undervalued based on prior valuation ranges, it's hard for me to see what drives better earnings and more investor interest in the near term.

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Komatsu Lacking A Spark

Seeking Alpha: Is It Time To Start Thinking Recovery For Komatsu?

The outlook for the construction and mining industries hasn't gotten much better, and with that both Caterpillar (NYSE:CAT) and Komatsu (OTCPK:KMTUY) have posted pretty uninspiring performances. While the environment for mining equipment is still under pressure from weak prices and shrinking capex budgets, and the construction market in key Komatsu markets like China and Japan is hardly great, Komatsu is investing in long-term innovation, maintaining a focus on margins, and positioning itself for the eventual recovery.

Since my last piece on Komtasu, these shares have outperformed Caterpillar, Joy Global (NYSE:JOY) and Terex (NYSE:TEX) by a pretty healthy margin. Although Komatsu isn't particularly well-positioned for a construction recovery in North America (or Europe), a turnaround in the emerging markets would be a different story. I don't think investors need to rush to buy this stock, but the valuation isn't too bad and I think the company's emphasis on its more lucrative parts/service operations and long-term innovation could pay dividends down the road.

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Is It Time To Start Thinking Recovery For Komatsu?

Seeking Alpha: FLSmidth Doing Better Than Expected Through The Trough

I may have been right about the serious impending erosion of orders, revenue, and EBITDA at FLSmidth (OTCPK:FLIDY) when I wrote about the company in June of 2013, but I missed the extent to which investors would cheer the company's cost-cutting and return improvement efforts. With the shares up 30% over the past year in U.S. dollars (and about 10% in the local Danish kroner), FLSmidth has handily outperformed most of its mining capex peers like Outotec (OTCPK:OUKPY) and Metso (OTCQX:MXCYY), as well as Joy Global (JOY).

I continue to believe that FLSmidth is looking at some challenging times in its end markets. Mining capex continues to fall and the company is facing more competition and consolidation in its large cement operations. Bold (but achievable) cost-cutting targets lead to me to a higher estimated fair value, but I have my doubts as to the company's ability to offset order declines with lower costs. Should orders continue to come in better than expected, though, and/or if the cycle isn't as bad as feared, FLSmidth's leverage to capex spending could send the shares higher.

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FLSmidth Doing Better Than Expected Through The Trough

Seeking Alpha: Has Joy Global Bottomed Out?

Cyclical stocks have a way of outdoing expectations both for good and bad. That makes it tricky to feel all that confident that Joy Global (JOY) is bottoming out, particularly when there are still long-term issues with the coal market that makes up a large percentage of the company's equipment revenue base. What Joy Global has done, though, is significantly improved its manufacturing process and shifted its capital focus from M&A to returning cash to shareholders. Provided that coal isn't in perpetual decline as a global energy source, these shares could still have some appeal even after a 20% run from recent lows.

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Has Joy Global Bottomed Out?

Investopedia: Winter Still Coming For Joy Global

Cyclical industries have a habit of answering the question “How much worse/better can things get?” in pretty dramatic fashion. With mining companies slashing capex budgets left and right, winter is definitely coming for leading mining equipment company Joy Global (NYSE:JOY). While management's success in streamlining operations, improving manufacturing yield, and reducing fixed costs should keep the company's head attached firmly to its body, there's a risk to shareholders that the market hasn't fully digested what weak orders today will mean for tomorrow's revenue. So although I believe Joy Global is undervalued on a long-term basis, investors buying or holding today have to be able to tolerate the thought that the shares could have further to fall before stabilizing.

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Investopedia: Caterpillar's Numbers Look Ugly, But That Was Expected

Even though the mining and construction markets stubbornly refuse to get better as quickly as analysts want them to, there's still a “want to believe” trade alive and well in Caterpillar (NYSE:CAT) shares. In other words, investors know that this company is built to withstand the ups and downs of the very cyclical construction, mining, and energy markets, and there's a definite interest in trying to buy low ahead of the recovery. Although the recovery looks a little further away now after the second quarter and Caterpillar shares aren't exactly cheap, they are a quality vehicle for playing those eventual recoveries in construction, energy, and mining.

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Investopedia: Komatsu Looks Like A Winner, But Valuation Is Tricky

Most American readers will be well aware of the significant share and scale that Caterpillar (NYSE:CAT) enjoys in the construction and mining industries. What may be less appreciated is that Japan's Komatsu (Nasdaq:KMTUY) enjoys similar scale on a global basis, and has done quite well for itself in markets like China and Indonesia. What's more, Komatsu has made considerable investments in a variety of automation technologies that could set its equipment apart in the coming years. Valuation here isn't a simple exercise, but a multi-metric analysis suggests that Komatsu may well be cheap enough to merit serious investment consideration.

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Investopedia: Joy Global's Qualty Not The Issue, But The Mining Capex Recovery Is

To its credit, Joy Global (NYSE:JOY) has done nothing during this cyclical mining equipment decline to shake investor confidence in the quality of the company or its management. Margins have held up surprisingly well, and new product development could help compensate for some of the weakness in the market. What's more, I don't think there's much doubt that coal demand will continue to increase around the world for at least the next decade or two. The question for investors, though, is the timing and magnitude of the upturn in equipment demand and how much of that is already incorporated into the shares.

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Investopedia: Is Caterpillar Facing A New Normal In Mining?

For those investors who believed a year ago that Caterpillar (NYSE:CAT) had somehow outgrown its cyclicality, the past twelve months have been a painful reminder that it's never “different this time”. The real question now, though, is what the new normal will look like. Although there's good reason to believe that Caterpillar's power and construction businesses can do better, the longer-term outlook for mining isn't as robust anymore. There is certainly the risk that estimates head even lower, but Caterpillar shares are starting to look a little interesting in terms of value.

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Seeking Alpha: Joy Global Tries To Beat The Cycle With Better Margins

The mining equipment industry is in a cyclical rough patch. This is not news; we've heard similar information from Caterpillar (CAT) and Atlas Copco (ATLKY.PK) among others, and the signs of a slowdown at Joy Global (JOY) have been apparent for some time. With the magnitude and timing of a significant recovery both key unknowns, one of the critical factors for Joy Global in the interim will be solid operating performance. News has been encouraging on that front, but investors have to be pretty bullish on the long-term outlook for the mining sector to see major value in Joy Global shares today.

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Joy Global Tries To Beat The Cycle With Better Margins

Seeking Alpha: Deere: Mayan Apocalypse Never Materialized, But Mind The Valuation

Given what we've heard recently from companies like Deere (DE), Caterpillar (CAT), Monsanto (MON), Eaton (ETN), and Joy Global (JOY), it looks like it's better to serve the overall-wearing community (farmers) as opposed to the hardhat-wearing community (construction and mining). Deere delivered pretty strong performance from its ag business once again, and though management is often conservative it looks like 2013 will be a solid year. That said, Deere is one of those well-loved industrial stocks, so investors shouldn't turn a blind eye toward valuation.

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Deere: Mayan Apocalypse Never Materialized, But Mind The Valuation

Seeking Alpha: Commodity Prices And China Make Caterpillar A Yo-Yo

Reading Caterpillar's (CAT) release and listening to the call, I get the sense of management basically shrugging its shoulders and saying "heck if we know" when it comes to the year ahead. I can't blame them in the least, as listening to all manner of conference calls this earnings season has turned up a wide array of feelings, impressions and outlooks for the economy both now and for the rest of 2013. For better or worse, the near-term outlook for Caterpillar is likely to be dominated by commodity price trends, while the long-term value seems only so-so right now.

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Commodity Prices And China Make Caterpillar A Yo-Yo

Investopedia: Joy Global And The Coal Conundrum

While it's hardly news that investors have sold all manner of heavy industrial OEMs as 2012 has progressed, and Joy Global (NYSE:JOY) has been hit a litter harder than most. Without the offsetting construction or agriculture businesses of Caterpillar (NYSE:CAT) or Deere (NYSE:DE), or the industrial compressor business of Atlas Copco (OTC:ATLKY), Joy Global shares have had a tough year. Although this large mining concern ended its fiscal year on a relatively positive note and valuation is not particularly demanding, these shares figure to be more volatile than average as investors guess about the timing of the eventual coal recovery.

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Investopedia: CAT's Slowdown No Long If Or When, But How Long?

The slowdown that has hit industrial companies ranging from Cummins (NYSE:CMI) to Dover (NYSE:DOV) to Honeywell (NYSE:HON) and Caterpillar (NYSE:CAT) has been long in coming and pretty well telegraphed. The economic malaise in Europe and slowdown in China has pressured demand for commodities and slowed the pace of construction - basically a one-two punch to Caterpillar's core businesses. Although the Street responded to CAT's third quarter earnings pretty calmly, I don't think today's valuation is close to washout levels and there could be further downside if the fiscal cliff bites into the U.S. economy and further slows the global economy.

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http://www.investopedia.com/stock-analysis/2012/CATs-Slowdown-No-Longer-If-Or-When-But-How-Long-CAT-JOY-GE-CMI1024.aspx

Seeking Alpha: Joy Global Tied To The Fate Of Coal

Many words have already been written about the global slowdown in heavy equipment demand, and the consequences that has brought for well-known industrial names like Caterpillar (CAT), Deere (DE), Komatsu (KMTUY.PK), and Cummins (CMI). For Joy Global (JOY), though, it's not just about a global slowdown in machinery orders, nor even a slowdown in mining equipment. Rather, the key question for Joy Global and investors over the next six to 18 months is whether 2012's dramatic slowdown in coal is a new normal or just another trough in a cyclical up-and-down story.

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Joy Global Tied To The Fate Of Coal

Seeking Alpha: Is Komatsu A Better Way To Play The Eventual Heavy Machinery Rebound?

As I recently lamented in an article on Cummins (CMI), U.S. investors don't let quality heavy machinery/industrial names like Cummins or Caterpillar (CAT) linger long in value territory. This leaves investors with a few choices - pony up and pay current prices (even if the risk/return tradeoff isn't great), avoid the sector altogether, or go shopping for less traditional names. I'm a fan of that last approach, and just as I think Atlas Copco (ATLKY.PK) is a solid industrial name overlooked because of its thinly-traded ADR listing in the U.S., Komatsu (KMTUY.PK) looks like a name at least worthy of further discussion.

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Is Komatsu A Better Way To Play The Eventual Heavy Machinery Rebound?

Seeking Alpha: Atlas Copco: Maybe The Best Industrial You Don't Know

Institutional investors may have the tools and resources that make international investing indistinguishable from domestic investing, but the retail investor is not so lucky. Consequently, high-quality industrial names like Atlas Copco (ATLKY.PK) can often go unnoticed by many investors. While Atlas Copco doesn't have the left-for-dead valuation of some industrials, investors who want a blue chip company with solid growth prospects can still pick up these shares for less than fair value.

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Atlas Copco: Maybe The Best Industrial You Don't Know

Seeking Alpha: Relief Will Only Carry Caterpillar So Far

Earnings from heavy machinery specialist Caterpillar (CAT) certainly gave investors a little relief, but they shouldn't underestimate the risks to growth over the next 12-18 months. While this company certainly does have solid long-term prospects, the possibility of long-term gain isn't always enough to assuage the short-term pain that can go with wholesale institutional abandonment of a sector.

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Relief Will Only Carry Caterpillar So Far

Seeking Alpha: Cummins - If The Good Are Struggling, Where Does That Leave The Rest?

A strong second half is looking less and less likely for the industrial sector. Class 8 truck orders have been declining, Europe is not getting better, and emerging markets continue to weaken. Now we have Cummins (CMI) warning that management no longer expects 2012 revenue to grow from 2011 levels.

While I have expressed some reservations in the past about Cummins' valuation and the risk of engine market share loss to internal programs, I have never questioned the quality of the business, or its status as a leader. So then, if Cummins is now of the opinion that there will be no revenue growth this year, where does that leave truck manufacturers and other heavy equipment producers?

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Cummins - If The Good Are Struggling, Where Does That Leave The Rest?