Equipment companies are often extremely cyclical, relying on annual spikes in initiatives such as construction and manufacturing. The firms in this post are all looking to recover from recent setbacks that have likely put share prices below value. But recent, and likely future, developments will allow these firms to realize their respective potential.
Terex could finally catch a break
Terex (NYSE: TEX ) is just getting ready to show shareholders what it's worth. The company made several acquisitions just before the recession. That timing made integrating the acquisitions even more challenging than it normally would be. Now that the recession is over, Terex should be able to spread its wings.
The company looks different than it did before to the recession, and it now controls a larger share of the global equipment market. Now that demand is rebounding, the firm's share price could fly . It still needs to work on its return on equity, however, which is quite low (see chart below).
Ingersoll tries to recover from Trane purchase
Ingersoll-Rand PLC (NYSE: IR ) could be set to recover from disappointing results of its $10.1 billion purchase of Trane in 2008, which hasn't yielded the returns Ingersoll would have liked. However, an improving residential construction business could help boost the company's sales.
While I think Ingersoll overpaid for Trane, the company's products are in about half of all commercial buildings in the U.S. That represents a considerable amount of inherited clients who could potentially become repeat customers in the years ahead. Furthermore, the brand is also popular internationally, which gives Ingersoll more exposure to emerging markets and an existing global customer base.
That said, the company still needs to improve last year's net profit margin of 7.5%. That is good, but not good enough for my portfolio. However, I believe that commercial and residential construction will increase substantially in the next few years. Currently, commercial construction is down 25% from its previous peak, and residential construction is down about 50% -- but this year's construction figures are improving over the last year's.
Cummins looks to capitalize on environmental focus
Cummins (NYSE: CMI ) is a leader in manufacturing the core components of emissions control and fuel economy. As the world's only fully integrated engine manufacturer, the firm could be there to rake in profits from government regulations that limit vehicle emissions. Between those new federal rules and rising gas and diesel prices, companies are now pursuing fuel-efficient vehicles more actively than ever.
Cummins also supplies engines for the Chrysler Dodge Ram. With Chrysler filing bankruptcy in 2009, Cummins' profits took a tumble. But car manufacturers, including Chrysler, are back on their feet, and that's good news for Cummins and its shareholders.
I see nothing but positive things ahead for Cummins, since it is a major manufacturer of hybrid and natural gas bus engines -- an attractive option for cities that want to embrace both environmental friendliness and fuel economy in their public transit fleets.
This stock is a buy
Cummins will do well in the years ahead because of its ability to develop the types of equipment that people want to buy. The company has dedicated much of its research and development budget toward building environmentally friendly engines and parts. It is becoming more and more evident that an environmental focus is important for transportation-related companies.
While Terex will likely manage to improve the efficiency of its operations by finally being able to more fully integrate its pre-recession purchases , it could take a while before the return on equity improves. Ingersoll has set itself up for long-term security with the Trane purchase, but it could take many years before such a large acquisition pays for itself and starts generating profits.