Ask any boy you know if it's fun to watch construction equipment at work. Heck, ask any grown man the same question and you'll get the same answer. The giant machines made by companies such as Caterpillar (NYSE:CAT), Deere & Company (NYSE:DE), and Terex Corporation (NYSE:TEX) are larger-than-life feats of human ingenuity. These three companies, by the way, also happen to be some of the best stocks in construction machinery.
The yellow one
Caterpillar's products are almost instantly recognizable because of their yellow color. Although it doesn't own the color, it's as much a part of the company's brand identity as the famous "Cat" logo. Cat's products span from backhoes to mining equipment, and it's known for high-quality and strong customer support, backed by a global sales network with nearly 180 dealers and over 160,000 dealer employees.
Cat knows being an industry leader is more than just building and selling high-quality products. If its machines aren't working, its customers aren't working. So the support network it's created is really about building relationships and, more important, a durable strategic advantage over smaller players that can't provide the same level of service to keep their customers up and running at all times.
The slowdown in China's economic growth has pushed Cat and other construction equipment makers' sales into low gear. Cat's top line fell in 2013 and 2014, and 2015 and 2016 look like they'll be rough, too. But the company has remained quite profitable throughout this downturn, which is a testament to its financial strength. Cat is easily one of the world's leading construction machinery makers, and it looks strong enough to survive this downturn, which means it could be a contrarian opportunity for those willing to go against the grain.
The green one
Just as yellow is associated with Cat, green is usually associated with Deere & Co., only Deere is best known for farm equipment. But that's not all it does. Nearly $7 billion of revenue, about 20% of the top line, comes from the company's Construction & Forestry division. Construction accounts for around two-thirds of that revenue.
Obviously, the farming market will have a bigger impact on Deere's results for years to come. But it's using its know-how in that area to expand beyond the farm. And Deere's reputation and support is just as strong as Cat's, so there's good reason to believe that it will increasingly become a formidable competitor.
Like Cat, however, Deere is feeling the pinch of weak demand, as falling commodity prices have led its customers to pull back. Yup, farms are being pinched, too. However, also like Cat, Deere remains quite profitable despite the tough environment. If you don't like Cat's focus on construction and mining, you might find Deere's farming and construction more to your liking. After all, eating is one thing that can never go out of style.
Going to different heights
But the giant earth-moving machines that Cat and Deere make aren't the only big construction machines you see at worksites. What about the cranes that tower high into the air? Those are often made by Terex. It doesn't have the same name recognition among little boys, but it's a leader at what it does, despite being a fraction of the size of the other two equipment makers.
Terex's specialty is best described as lifting equipment. And while it makes construction cranes, you'll also find its gear at seaports, in factories and warehouses, and even in cherry-picker trucks used by utilities to fix their power lines. That said, the company makes more than these things, including small-form construction gear similar to what Cat and Deere provide, as well as cement trucks and mining equipment. It's a pretty diversified business and a key player in the construction machinery industry because of its unique focus.
In fact, its niche skill in the lifting space is what makes it a worthwhile company for investors to look at. Keep in mind that its modest size relative to Cat and Deere increases risk to some degree because it has a little less breathing room on the top and bottom lines. Still, it has managed to keep its bottom line in the black for all but one year over the past decade (both Cat and Deere remained profitable throughout that span). So if you're looking for a construction player with a different twist, Terex might be worth a deeper dive.
These ain't toys
Cat, Deere, and Terex don't make toys. They make massive machines that do the type of work that makes little boys (and big ones) stop and watch with looks of awe and wonder. They also happen to be some of the best stocks in the construction machinery sector. Each is a little different and might appeal to different types of investors, but all would be a great way to gain exposure to this arena.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Terex. 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.
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