Komatsu Beating Estimates And Raising Guidance, But Going Nowhere Fast

In my last article on Komatsu (OTCPK:KMTUY), I noted a growing rift between the performance of Komatsu as a company and the performance of its shares. Since then, the company has continued to execute well, handily beating expectations, but the shares have arguably still lagged what that performance should have earned. Komatsu’s local shares are up about 8%, while the ADRs are down about 8%, versus a 15% move in Caterpillar (CAT) shares, 3% moves at Deere (DE) and Terex (TEX), and a much weaker performance at Volvo (OTCPK:VLVLY) and Hitachi Construction Machinery (OTCPK:HTCMY).

I believe Komatsu is undervalued relative to what the market has typically paid for peak earnings, but I’m also concerned that demand for construction machinery in markets like North America isn’t likely to get much better, and that demand in Indonesia and across the mining sector could likewise soften from here. I see a trading opportunity here, but I’d be careful about not overstaying my welcome.

 

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Komatsu Beating Estimates And Raising Guidance, But Going Nowhere Fast

The Lack Of Reaction To Strong Earnings From Komatsu Is Getting Interesting

 

I was pretty negative on Komatsu (OTCPK:KMTUY) when I last wrote about the stock in mid-2021, mostly due to my concerns about the long-term ramifications of what I believe were bad strategic decisions in the past. At the same time though, I did expect to see improving results in the reported financials as global construction markets recover and miners refresh and expand their aging fleets. The shares have basically done nothing since then, outperforming mining-focused Weir (OTCPK:WEGRY) and more or less keeping pace with other comps like Caterpillar (CAT) and Epiroc (OTCPK:EPOKY).

I still have concerns about the long-term strategic positioning of Komatsu, but I'm finding the lack of response to better-than-expected earnings over the last several quarters to be curious. All told, I'm more bullish now on mining and construction equipment than before, and I do think there are signs that Komatsu is moving to correct past strategic blunders. I'd never want to own Komatsu as a long-term holding, but I'm increasingly interested in the shorter-term opportunity here.

 

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The Lack Of Reaction To Strong Earnings From Komatsu Is Getting Interesting

Komatsu Leveraged To Improving Mining Demand, But Long-Term Strategic Positioning Is Iffy

 

It’s been a mixed-to-down year so far for many companies leveraged to the construction and mining equipment market, even though mining equipment orders are picking up nicely. Some of this is a “sell the news” reaction as many stocks ran in 2020 in anticipation, but there have also been growing concerns about the health of the Chinese market.

In any case, Komatsu (OTCPK:KMTUY) has been one of the weaker plays, with the shares down about 5% so far this year and down about 18% since my last update on the company. Not only has management guided to lower operating profits and more pressure on the Chinese business since that last article, but analysts seem increasingly worried about Komatsu’s strategic positioning in both the construction and mining markets, and its vulnerability to Chinese competition. 

I’ve expressed my own concerns about Komatsu’s long-term strategic positioning before – I believe the company has stayed focused on high-end construction equipment in Asia for too long, and I believe the company overcommitted to soft rock mining (coal, in particular) and underinvested in hard rock equipment (most relevant to copper, iron, and gold). While I do still see Komatsu having room to outperform as a trade, particularly if the initial guidance for FY’22 proves conservative, I don’t like this as a long-term holding.

 

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Komatsu Leveraged To Improving Mining Demand, But Long-Term Strategic Positioning Is Iffy

Komatsu Emerging From The Downturn With Upside If Mining Companies Start Spending Again

With some improvement in its core construction and mining markets, Komatsu (OTCPK:KMTUY) has done pretty well since my last update – outperforming underground mining equipment specialist Epiroc (OTCPK:EPOKY) and mining capex provider Weir (OTCPK:WEGRY), but not keeping pace with Caterpillar (CAT), CNH (CNHI), or Deere (DE) over that time.

I do like Komatsu’s commitment to areas like automation and electrification, but I also believe the company has been too slow dealing with challenges to its Indonesian coal mining and Chinese excavator businesses. An infrastructure stimulus bill in the U.S. and strong global commodity prices could extend this recovery, particularly given over-aged mining equipment fleets around the world, but I look at this as more of a trade now than a fundamental recovery story.

 

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Komatsu Emerging From The Downturn With Upside If Mining Companies Start Spending Again

COVID-19 Brings Komatsu Back To More Reasonable Levels

There are ample concerns about both the construction and mining end-markets now, and that can be seen in Komatsu's (OTCPK:KMTUY) 20% year-to-date share price decline, a decline more or less on par with Caterpillar (CAT) but worse than Epiroc's (OTCPK:EPOKY) performance over the period. Although construction and mining activity has held up reasonably well, major customers are far more cautious on capital spending now, and that is likely to push Komatsu's revenue, margins, and cash flows down in fiscal 2021.

The main attraction I see in Komatsu now is that it's trading at what has historically been an attractive multiple. While I do have my concerns with the company's market share in the Chinese excavator market and its leverage to coal mining, I think those issues are more than reflected in the share price. I won't claim this is the best equipment company, but I do think the risk-adjusted return potential is good enough to merit at least a spot on a watchlist.

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COVID-19 Brings Komatsu Back To More Reasonable Levels

Komatsu Undervalued, But Needs To Stay On Top Of Innovation

Komatsu (OTCPK:KMTUY) shares are up only a little from my last update, lagging many of its peers in construction and mining amid a more challenging outlook for both of those markets. The shares still look undervalued, but construction machinery demand growth isn't looking particularly strong in 2020 and the mining outlook has weakened significantly in recent months. Longer term, I also have concerns about Komatsu's ability to maintain share in the Chinese construction market and the larger mining equipment market. That makes this a tougher call, but the valuation is not demanding, the dividend yield is solid, and management has shown a disciplined but successful strategy toward innovation in the past.

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Komatsu Undervalued, But Needs To Stay On Top Of Innovation

Komatsu Kicked Around As Management Looks For Weaker Machinery Demand

Not unlike the situation at FLSmidth (OTCPK:FLIDY), investors seem to have fallen out of love with Komatsu (OTCPK:KMTUY), as they pull back from heavy machinery, and particularly those companies tied to the mining industry. It was getting harder and harder to justify Komatsu’s price on the basis of full-cycle cash flow, and with the company setting an operating income target for fiscal 2020 (ending March 2020) that was almost 20% below prior expectations, a lot of worries about mining and construction capex have come home to roost.

It can be a strange thing to go from worrying about over-valuation to the other side of the coin, particularly when you do expect near-term weakness in the business. I do think Komatsu is probably undervalued now on the basis of free cash flow, margins, and returns, but if I were going to take a contrarian position in mining, I think I’d prefer a more productivity-centric story like FLSmidth than Komatsu.

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Komatsu Kicked Around As Management Looks For Weaker Machinery Demand

Mining And China Seem To Be Supporting Komatsu

Komatsu (OTCPK:KMTUY) (6301.T) has been lagging peers and rivals like Caterpillar (CAT) and Hitachi Construction Machinery (OTCPK:HTCMY) over the past couple of years, despite solid order trends at Komatsu, good initial results in its automation efforts, and further synergies to be gained from the Joy Global deal. Over the last couple of months, though, Komatsu shares have perked up a bit and risen more than 10% since my last update, on renewed enthusiasm for the mining business and the Chinese construction market.

Komatsu still looks a little undervalued, but the company has a lot riding on expanding its mining business and achieving those hoped-for synergies in the mining business. Although the construction business isn’t done yet for this cycle, the mining business really needs to step up for the shares to keep moving higher.

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Mining And China Seem To Be Supporting Komatsu

Komatsu Sliding Despite Ongoing Order Growth

Even though many companies in the mining industry are saying the capex recovery is only just starting, and companies in the construction space still see more upside for equipment demand, the shares of major equipment manufacturers have been reflecting a very different assessment. Komatsu (OTCPK:KMTUY) shares are down about 15% since my last update in the spring of this year, and down 20% year-to-date though up about 12% over the last year, as investors have been selling down Caterpillar (CAT), Hitachi Construction Machinery (OTCPK:HTCMY), Sany, and Manitowoc (MTW) on worries about cyclical demand and margin pressures from input costs (namely steel), not the mention the risk of accelerating global trade tensions.

As it concerns Komatsu, I think the year-to-date performance might be a little overdone. I do have some concerns about slowing construction demand, but I think Komatsu is looking at a good opportunity in the mining business, and I think the company’s significant investments in automation (both external and internal) will pay off in the coming years. With what appears to be a valuation that is already baking in a lot of weakness, I think these shares are worth another look today.

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Komatsu Sliding Despite Ongoing Order Growth

Komatsu Offers More Than An Upswing In Mining

As often happens with companies that serve deeply cyclical end-markets, the timing and magnitude of the swings in Komatsu's (OTCPK:KMTUY) end-markets have defied expectations. While improving construction and mining markets have been part of the Komatsu story for a while now, the strength of the recoveries (especially in mining) has exceeded expectations, as has Komatsu's operating leverage and execution.

With major mining companies only starting to reinvest in equipment and plenty of room to grow in automation-driven investments, I believe Komatsu could still offer some upside from here. The shares aren't cheap on a free cash flow basis, but that's not all that unusual and a forward multiple in line with long-term averages suggests 10% more upside from here with the possibility of further upward revisions.

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Komatsu Offers More Than An Upswing In Mining

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

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: Komatsu Looking For A Foothold

Six months ago, I thought investors could afford to wait on buying into Komatsu (OTCPK:KMTUY) (6301.TO), as this Japanese manufacturer of construction and mining equipment was likely looking at a multiyear process of demand repair. I don't think investors have really missed out on much - the roughly 8% drop in the ADRs since then is not catastrophic (certainly not relative to Joy Global's (NYSE:JOY) 31% drop), but investors would have done better in Caterpillar (NYSE:CAT), Volvo (OTCPK:VOLVY), Terex (NYSE:TEX) or by avoiding the space altogether.

Looking ahead, there's arguably a little more value in the shares but the outlook still isn't promising. There's a real threat that U.S. equipment demand isn't going to get much better and that growth in Europe won't offset weakness in Asia and particularly China and Japan. Komatsu does have an opportunity to stand out on a relative basis with its automation initiatives and internal cost reductions, but I'm not sure there's enough upside to make the wait a comfortable one.

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Komatsu Looking For A Foothold

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: Komatsu's Relative Performance Gap May Not Be Unfair

To start with, I think Komatsu (OTCPK:KMTUY) is one of the better-run heavy machinery companies in the world, and I think the company's strategy to differentiate itself with technological innovation (particularly in automation) is a very good move. That said, the stock has notably lagged Caterpillar (CAT), Joy Global (JOY), Terex (TEX), and Atlas Copco (OTCPK:ATLKY) over the past year, and I don't necessarily think that Komatsu is a great catch-up trade today.

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Komatsu's Relative Performance Gap May Not Be Unfair

Seeking Alpha: Titan Machinery - Is This Roll-Up Rolling Over?

I've had my doubts about Titan Machinery (TITN) for a while now, as I've seen more than a few debt-funded equipment dealership roll-up stories in the past, and they often don't end well. To that end, the last year and two years have been pretty dicey for buy-and-hold investors, as concerns about the health of the agricultural equipment market and the potential for a rebound in construction equipment demand weigh on sentiment.

As it stands today, I have very mixed feelings about this business. I do have some concerns about the health of the ag equipment sector in the coming years, and I have real doubts about Titan's ability to leverage CNH Global (CNH) construction equipment into a viable construction equipment dealership business. On the other hand, it seems harsh to say that the company creates no value at all, and it trades only about 5% above tangible book value. I'd rather play a bullish (or bullish relative to consensus) call on agriculture and/or construction through names like Deere (DE), Caterpillar (CAT), Kubota (KUBTY.PK), or Komatsu (KMTUY.PK), but Titan's underperformance makes it hard to be loudly bearish on the name.

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Titan Machinery - Is This Roll-Up Rolling Over?

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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