Prospects in the United States
The world's largest economy holds approximately 17.1% of the global
gross domestic product (GDP), on a purchasing power parity (PPP)
basis, in 2012. Next in the ranking are China and India, with
respective GDP share of 14.9% and 6.4%.
Machinery shipments increased by 2.9% in the initial three months
of 2014, according to the U.S. Census Bureau report published in
May 2014. Shipments for industrial and metalworking machinery rose
by 22.2% and 8.7%, respectively, while that for farm as well as
construction machinery fell by 6.3%. New machinery orders were up
6.4% while order backlog grew 9.2%.
Export demand has been considered a key factor for the U.S.
machinery industry. In 2013, the country's construction and
agricultural equipment exports fell 25% and 6% year over year
respectively, according to a report published by the Association of
Equipment Manufacturers (AEM). However in the coming years, the
U.S. is expected to witness growing international demand for
technologically advanced construction and agriculture equipments.
Unemployment, though a continually disturbing factor, has showed
signs of improvement in Apr 2014. As per the latest report by the
Bureau of Labor Statistics, job additions in April were 288,000,
increasing from 203,000 added in March. The unemployment rate has
fallen 40 basis points (bps) to 6.3%. On an average, job additions
in the last three months (April, March and February) were 238,000.
This latest job report strengthens the view that the Federal
Reserve will continue to taper its quantitative easing program.
Besides positive signs from the labor market, there is a glimmer of
hope emanating from the evidence of growing demand in the housing
as well as durable goods markets. Conditions in the credit markets
are also improving slowly.
The recovery noticed in the Japanese economy in the past few
quarters was primarily triggered by economic policies undertaken by
the government, recovery in capital spending and higher machinery
orders from private sector and manufacturing industries. The
country increased its sales tax by 3% effective Apr 2014, with a
view to curb its growing debt levels. This measure is expected to
drive growth in the medium to long term.
However, the latest report by Japan's Cabinet Office shows that
total machinery orders in Feb 2014 fell 5.9% from the prior month.
Private-sector machinery order (excluding volatile orders from
ships and electric power companies) or core machinery order were
down by 8.8%, raising concerns over the future of capital
investments by companies. Orders from governments and overseas
clients increased 6.2% and 2.4%, respectively.
The weak order trends and the nervousness regarding the impact of
sales tax hike on demand of goods compelled the Bank of Japan to
lower its real GDP growth forecast to 1.1% for fiscal 2014 (ending
Mar 2015), from the earlier expectation of 1.4%. Also, the IMF has
lowered its growth forecast for the economy by 30 bps to 1.4% for
China: The Chinese government is focused on rapid urbanization, and
has planned major investments accordingly. Domestic demand is
strong in the country while exports are also on the rise. Further,
efforts in improving trade relations with Brazil, Russia and other
countries are expected to boost growth.
The world's second largest economy recorded a 0.8% year-over-year
increase in its foreign trades in Apr 2014. Exports were up 0.9%
while imports grew 0.8%. Trades with the European Union and the
U.S. increased 8.5% and 2.4% respectively, in the first four months
of 2014. Industrial production in Mar 2014 increased 8.8% over the
Growth in 2014 is expected to be driven by investments and a rise
in demand from the advanced economies. The IMF anticipates the
Chinese economy to grow by 7.5% in 2014 and 7.3% in 2015.
India: Industrial production in India decreased 1.9% year over year
in Feb 2014, mainly due to weak manufacturing output. According to
the IMF, the country is projected to grow 5.4% in 2014 and 6.4% in
2015. Rising domestic and external demand, expectation of policy
improvements and better monsoon conditions are the primary drivers
of the country's growth.
Brazil: The country, with a population of over 200 million, is
growing fast as the favorable destination for foreign direct
investments. Industries like tourism, steel and electricity, among
others, are gaining strength and promise robust growth.
The Brazilian government, under its Growth Acceleration Program, or
PAC - phase II, has planned major investments for the development
of ports, railroads, airports, wind farms and roads. Other areas of
focus are sanitation, energy and logistics. Also, to promote its
export businesses with other countries, roughly 24 Free Trade Zones
(FTZ) is being set up across 20 Brazilian states.
However, the outlook for 2014 is a bit gloomy owing to low private
investments and inadequate infrastructure. The IMF has lowered its
growth forecast on the country to 1.8%, down 50 bps from its prior
estimate. In Mar 2014, the country's industrial production fell by
0.9% year over year.
South Africa: The government is focused on improving its mining,
manufacturing chemicals and agricultural sectors. Huge public
investments have been announced under the infrastructure
development programs. Also, the country is keen on expanding its
trade relations with its largest exporter-importer country, China.
The IMF expects the country to grow by 2.3% in 2014 and 2.7% in
In fourth-quarter 2013, GDP grew by 3.8% over the year-ago quarter,
while in Mar 2014, industrial production was up by 0.7% over the
Other Major Players
Korea: Industrial production in Mar 2014 increased 2.8% from Mar
2013, according to the latest data released by Statistics Korea.
The country seems to be recovering slowly from the impacts of weak
exports caused by uncertain economic conditions in the Eurozone.
Thailand: The country is making huge investments, both domestic and
foreign, to improve its service and public utilities, metal
products industries as well as machinery and transport
equipment-related industries. To further enhance its exports, the
government is laying emphasis on infrastructural developments and
free trade agreements.
Industrial production declined 10.4% in Mar 2014 from the year-ago
period, as reported by the Office of Industrial Economics. The
disappointing result points towards weakening domestic demand.
Eurozone - Showing Signs of Improvement
The Eurozone's industrial production (excluding construction) in
Feb 2014 inched up by 0.2% from Jan 2014 while rising 1.7% year
over year, according to data released by the Eurostat in Apr 2014.
According to the VDMA Machine Makers' Association, German machine
tool orders in Jan 2014 increased 6.0% year over year. Domestic
orders were up 2% while international orders grew 7%.
Zacks Industry Rank
Within the Zacks Industry classification, Machinery is broadly
grouped into the Industrial Products sector, one of the 16 broad
More than 260 industries are ranked in the 16 Zacks sectors based
on the earnings outlook for the constituent companies in each
industry. To learn more visit:
About Zacks Industry Rank
As a guideline, industries with Zacks Industry Rank of #88 and
lower are considered to have a positive outlook, those between #89
and #176 have a neutral outlook while the ones with #177 and higher
possess a negative outlook.
The machinery industry is further sub-divided into five industries
at the expanded level: Machine Tools and Related Products,
Machinery - Construction and Mining, Machinery - Electrical,
Machinery - Farm and Machinery - General Industries.
The Zacks Industry Rank for Machine Tools and Related Products is
#94, Machinery - Construction and Mining is #95, Machinery -
Electrical is #97, Machinery - Farm is #98 and Machinery - General
Industries is #99. Considering the Zacks Industry Rank of all the
machinery related industries, it can be deduced that the sub
segments of the machinery industries have a neutral outlook.
Earnings Trend of the Sector
Results for the Industrial Products sector in first-quarter 2014
provided little reason for the investors to rejoice. Roughly 84% of
the sector's companies in the S&P 500 group reported 9.3%
year-over-year growth in earnings till May 9, 2014. Earnings beat
ratio (percentage of companies coming out with positive surprises)
was 66.7%. Revenues edged down 0.7% year over year with a beat
ratio of just 18.2%.
The earnings growth path is a bit erratic for the sector, as after
a 9.3% earnings growth for the first quarter, only a marginal
increase of 0.8% is expected for the second quarter. Second half of
2014 is likely to experience a 3.8% earnings growth in the third
quarter and 8.7% in the fourth quarter. For the full-years 2014 and
2015, earnings growth are anticipated to be 7.8% and 12.3%
For the top line, a wider fall of 1.5% is projected in the second
quarter. Thereafter, revenues are likely to inch up 0.7% in the
third quarter and 1.3% in the fourth quarter. For the full-years
2014 and 2015, revenues are predicted to rise 0.1% and 4.1%
In view of all the Zacks sectors combined, total earnings growth
rate in first-quarter 2014 is anticipated to be 1.2%. Revenue
growth is predicted at 0.9% with a modest gain expected in margins.
For more information about earnings for this sector and others,
please refer to our
'Earnings Trends' report
Important Players in the Machinery Industry
Deere & Company
) is a $34.9 billion company operating in the farm machinery
) is a $65.6 billion company operating in the construction and
mining machinery industry. The company has recorded a 5.5% earnings
growth in the past five years versus a meagre 1.30% for the
industry. Year-to-date return has been recorded at 21.7%. Prospects
are bright for the company as earnings are anticipated to rise
10.10% in the next five years.
Other top players in the agricultural, construction and mining
machinery industries include
Prime companies operating in machinery industries other than
agricultural, construction and mining are
Rockwell Automation Inc.
Illinois Tool Works, Inc.
Manitowoc Company, Inc.
), among others. Of these, Illinois Tool Works is a $35.6 billion
industrial tool maker. The company's earnings in the past five
years have grown by 5.00% and is expected to increase 9.30% in the
next five years. Year-to-date, the company has yielded a solid
return of 29.0%.
Fiscal government expenditures play a counter-cyclical role curbing
the ill effects of slower economic development and a tight credit
market. China's structural stimulus package, government spending on
social welfare, construction of low-cost housing and completion of
infrastructure projects on agriculture, forestry and water
resources received special attention.
Moreover, the U.S. Congress had a stimulus package designed in 2009
that had money flowing into infrastructure spending. Also, The
American Energy & Infrastructure Jobs Act (H.R. 7) will boost
spending in infrastructure projects. Approximately $260 billion
will be allocated to fund roads, bridges and highway projects over
We remain wary of the rising raw material costs of some of the
major players of the machinery industry. Steel prices along with
energy, especially coal and fuel prices, remain the prime causes
Research and development costs are also on the rise for machine
makers as they seek to manufacture more sophisticated and
technologically advanced machinery. Availability of funds remains a
stumbling block as some major nations are still struggling to
stabilize their own economies.
Although favorable commodity prices are a boon, government policies
affecting prices along with export and import policies and trade
relations with other countries will influence the machinery
industry at large.
To Conclude: Prospects are Bright
Despite economic uncertainties still persisting in many parts of
the world, efforts for implementing better policies, growing trade
relations and an escalating population are prime catalysts driving
the demand for better infrastructure, modernized methods of
agriculture and mining/manufacturing tactics. All these will
eventually boost the demand for technologically advanced equipment
in these industries. Moreover, looking ahead, the growth path
widens for the emerging and developing nations, which will
inevitably become rewarding destinations for machine makers
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