Oh, to be in a cyclical upswing. As renewed signs of life in commercial and non-residential construction lead rental companies to replenish and augment their fleets, construction equipment maker JLG (NYSE:JLG) is living higher on the hog.
Fiscal fourth-quarter sales climbed 34% as the company coupled 33% growth in U.S. sales with 36% growth from international customers. Despite persistently high steel costs and some difficulties in securing an adequate and timely supply of components, gross margin improved slightly. Better still, operating margin (adjusting for merger costs) improved even more, and JLG more than doubled its net income from the year-ago level.
Things look pretty good beyond the income statement as well. Inventory turns are moving up nicely and receivables appear to be in good shape, too. Turning to cash flow, JLG produced $96 million in free cash flow for the year -- reversing the year-ago loss. Investors reading the company's earnings release should note that it uses a very different definition of free cash flow than what we at The Motley Fool normally use (that is, operating cash flow minus capital expenditures).
The trick with investing in cyclical companies, though, is that as soon as things get good, people start trying to forecast when the good times will end. One very crude way of gauging that is to examine the company's guidance in the context of analyst expectations. While JLG beat the estimate for this quarter, management's guidance for the next year was actually a bit below the mean published Wall Street estimate. Now, I'll also point out that management has a history of being somewhat conservative with guidance; that may be the case once again, as the company suggested on the conference call.
Although hurricanes Katrina and Rita could disrupt business in the short term, the cleanup and rebuilding efforts should be a positive factor for demand. What's more, I keep hearing from companies that commercial construction is on the way up -- good news for JLG, and others like Terex (NYSE:TEX), Caterpillar (NYSE:CAT), and Ingersoll-Rand (NYSE:IR) as well. While there may very well be room left to run, investors should remember that cyclical stocks are like parties -- you don't want to show up too soon, nor stay too long.
For other Takes tied to the construction industry:
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
