Construction Machinery: Investing Essentials

The construction machinery industry, and what investors need to know about it.

Aug 1, 2014 at 11:09AM

If you have ever gone by a construction site and looked in awe at the heavy machinery on display, then you will already be familiar with some of the biggest names in the construction machinery sector. Companies like Caterpillar (NYSE:CAT), Deere (NYSE:DE), and Manitowoc (NYSE:MTW) are all household names, and if something big is being built, somewhere, then you can bet they will have a hand in it. The construction machinery sector can be difficult to invest in, mainly because its fortunes can fluctuate wildly with the economy. But it can also be highly rewarding if you get the timing right. Here is what you need to know before investing in the industry.

What is the construction machinery industry?

Cons

Caterpillar. Source: The Motley Fool

Simply put, the construction machinery industry covers companies that produce machinery for use in civil engineering projects. The most visible components of the sector tend to be excavators, cranes, and earth movers on building sites. But engineering projects also encompass activities as diverse as mining, dam construction, water and waste-water systems, bridges, ports, and tunnels.

In other words, you shouldn't just think of the sector as an investment play on commercial building activity because a large number of the engineering activities listed above will be public infrastructural projects -- a point I will return to later.

How big is the construction machinery industry?

According to International Construction magazine's Yellow Table, revenue for the top 50 construction machinery firms came in at $163 billion in 2013. Here is a breakdown of construction equipment revenues from the 10 leading players.

Company 2013 Construction Equipment Revenue ($B) Share of Total
Caterpillar 31.0 19.0%
Komatsu 17.6 10.8%
Volvo Construction Equipment 8.1 5.0%
Hitachi Construction Machinery 7.9 4.9%
Liebherr 7.5 4.6%
Terex 7.1 4.3%
Zoomlion 6.1 3.7%
Sany 6.1  3.7%
Deere 5.9 3.6%
Doosan Group 5.3 3.2%

Source: International Construction magazine's Yellow Table

To put this list into context the current market capitalization of the two U.S. companies in the list is $63 billion for Caterpillar, and $31 billion for Deere -- although not all of their activities encompass construction machinery.

How does the construction machinery industry work?

Manufacturers tend to use distributors to get their products to end customers. This can cause some variability in sales for manufacturers like Caterpillar, as sometimes distributors will buy too much machinery, which they will then need to sell off in subsequent quarters. Conversely, distributors may buy too little machinery in previous quarters, which then needs to be corrected by placing large equipment orders.

In other words, revenue and orders at companies like Joy Global (NYSE:JOY)(largely mining equipment), Komatsu (NASDAQOTH:KMTUF), Caterpillar, and Deere can vary a lot from quarter to quarter depending on their distributors buying patterns, and ultimately, end-market demand. This adds to the unpredictability in the industry.

What are the drivers of the construction machinery industry?

The industry tends to be, what the investment industry calls "cyclical." In other words, its fortunes are largely dependent on the economy. When the going is good, investment in construction activity takes place. When economic growth starts to falter, construction plans get shelved and orders for machinery dry up.

Cons

Construction machinery. Source: The Motley Fool 

But in previous recessions governments across the globe have stepped up and invested in large-scale public projects (roads, public infrastructure, ports, etc.) as a way of supporting economic growth when the private sector is weakening. This type of public investment has, traditionally, helped reduce the cyclicality of the industry. For example, China's response to the last recession was to launch a $586 billion stimulus plan to be spent largely on national infrastructure and social welfare projects -- something that undoubtedly helped to reduce the pain for the construction machinery industry in the recession.

Fast-forward to today and the increasing debt burdens being built up by governments -- including China -- suggest that they will be hard-pressed to repeat this kind of investment if a recession occurs in the near future. In other words, the construction machinery sector appears to be getting even more dependent on private sector growth, and therefore becoming even more cyclical. It's also getting more reliant on China as -- according to the Statista website, China will continue to contribute more than 30% of global construction machinery demand in 2015 -- compared to 27% from North America.

All told, it's a great industry to be invested in when the economy is starting to make an upturn. On the other hand, it appears to be becoming more cyclical, so potential investors should be aware of the extra risk involved if the global economy turns down sharply. In addition, keep a close eye on construction activity in China.

Lee Samaha has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers