Recovery - or the extent of recovery - from the 2008 global
crisis is still fairly modest. Achievement on this front, as
witnessed from the equity market improvements, has been quite
remarkable but the pursuit to reach the pre-crisis level is still
According to the International Monetary Fund's (IMF) World Economic
Outlook published in Jul 2013, the world economy will likely grow
by 3.1% in 2013 and 3.8% in 2014. Growth in advanced economies and
emerging and developing countries are projected at 1.2% and 5.0% in
2013 while the same for 2014 are estimated at 2.1% and 5.4%,
These projections represent a slight decline to what was predicted
by the IMF in April 2013 due primarily to weak domestic demand,
slower than anticipated growth in emerging markets and prolonged
Eurozone crisis. No doubt obstacles still persist; nevertheless,
the overall growth picture may not materially deteriorate or
deviate from the IMF's July 2013 forecast.
Talking about the Machinery industry, increasing economic
activities spur demand for industrial products, which in turn also
boost the need for new/advanced machinery. Based on this direct
correlation, anticipation of improvement in global economic growth
is a positive sign for the future prospects of the machinery
The major end-markets for the machinery industry include
agriculture, construction, mining and energy industries, among
others. A brief discussion with a glimpse of the future prospects
of the machinery industry among different nations has been provided
Machinery Industry Prospects in the United States
The IMF expects the United States to grow 1.7% in 2013 as against
1.9% predicted earlier and roughly 2.7% in 2014. High unemployment
still seems to be a disturbing factor, though there is a glimmer of
hope emanating from evidences of strengthening demands in the
housing as well as durable goods markets. Conditions in the credit
markets are also improving slowly.
The Machinery industry is one of the most attractive industries in
the United States. Growth prospects for this industry can be
deduced from the indicators to the performances in the recent past.
In the second quarter of 2013 (Apr-Jun), industrial production in
the United States rose by an annual rate of 0.6% while the same in
the month of Aug rose by 2.7% as compared with the year-ago period.
Manufacturing output decreased 0.2% in the quarter.
According to the US Census Bureau report published in Aug 2013,
machinery shipments in the first half 2013 increased 4.1% year over
year while new machinery orders grew 4.5%. However, machinery order
backlog at the end of the first two quarters were down 10.0%.
Shipments for construction and industrial machinery rose by 27.2%
and 10.4%, respectively, while that for mining equipment and farm
machinery dipped 6.5% and 7.3%, respectively.
Exports demand has been considered crucial for the future growth
prospects of the US machinery industry. According to a report
published by the Association of Equipment Manufacturers (AEM), the
United States' construction equipment exports fell 21% in the first
half 2013 while agricultural equipment exports registered a 9.5%
In years to come, international demand for technologically advanced
construction and agriculture equipment are expected to improve for
the United States. In this respect, it is worth mentioning that the
US-Russia trade bill will boost U.S. exports of construction
equipment to Russia, the 11th largest export market for U.S.
According to the latest report published by Japan's Cabinet Office,
on a monthly basis, core machinery orders in Jul 2013 grew by 4.4%.
Recovery in capital spending and higher orders from private sector,
manufacturing industries and governments were the main drivers of
Also, overseas demand for machinery grew 1.4% in July, indicating
prospects of a solid demand growth in the months ahead. Industrial
production in the month grew 1.8% over the year-ago quarter, as
reported by the Ministry of Economy, Trade & Industry.
According to the IMF, the Japanese economy is projected to grow
2.0% in 2013 and 1.2% in 2014.
China and India, the two major emerging/developing nations, are
expected to show signs of tangible growth in the years ahead.
According to the IMF, the Chinese economy is projected to grow 7.8%
in 2013 and 7.7% in 2014.
The Chinese government is focused on rapid urbanization, with major
investments planned towards this end. Domestic demand is strong in
the country while exports are also on the rise. Further, efforts on
improving trade relations with Brazil, Russia and others are
expected to boost growth.
Industrial production in India revived in the month of July 2013
increasing 2.6% compared with the year-ago period attributable to
increase of 3% in the manufacturing sector and 5.2% in the power
generation sector. According to the IMF, the country is projected
to grow 5.6% in 2013 and 6.3% in 2014 fuelled largely by rise in
domestic and external demand, expectation of policy improvements
and better monsoon conditions.
Brazil is fast growing as a favorable destination for foreign
direct investments. With a population of over 200 million people -
according to the data released by the Brazilian Institute of
Geography and Statistics (IBGE) - the country's hunger for better
infrastructural and agricultural requirements are fast growing.
Industrial production in the month of Jul 2013 has grown 2.0%
compared with the year-ago period.
Industries like tourism, steel, electricity, among others offer
promising growth especially as the country is gearing up to host
the upcoming 2014 Soccer World Cup and 2016 Olympics sporting
events. In the second quarter 2013, the country's Gross Domestic
Product (GDP) grew 3.3% compared with the year-ago quarter while a
sequential growth of 1.5% was registered.
The Brazilian government, under its Growth Acceleration Program or
PAC - phase II, has major investments planned for development of
ports, railroads, airports, wind farms and roads. Other areas of
focus are sanitation, energy, logistics etc. Also, to boost its
export businesses with other countries, roughly 24 Free Trade Zones
(FTZ) are being set up across 20 Brazilian states. The first, the
Pecem free trade zone, in the state of Ceara, began operations
According to the IMF, the country is expected to grow 2.5% in 2013
and 3.2% in 2014.
South Africa is also making progress and a sequential increase of
3% was recorded in the country's Gross Domestic Product in the
second quarter of 2013. In July 2013, South Africa's industrial
production increased 5.4% as compared with the comparable period a
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 cum importer country, China.
According to the IMF, South Africa is expected to grow 2.0% in 2013
and 2.9% in 2014.
Other Major Players
Korea's industrial production in the month of July 2013 decreased
0.1% compared with the previous month, according to the latest data
released by Statistics Korea. Despite the decline, the country
seems to be recovering slowly from the impacts of weak exports due
to global uncertainties, especially the Eurozone crisis.
Thailand's industrial production declined 4.5% in the month of Jul
2013 compared with the year-ago period, as reported by the Office
of Industrial Economics. 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.
Eurozone - Still a Hurdle
The Eurozone exhibited meager sequential recovery of 0.3% in the
second quarter 2013, according to the data released by the Eurostat
in Aug 2013. Industrial production (excluding construction), on a
monthly basis, in the Eurozone fell by 1.5% in Jul 2013.
On a year-over-year basis, industrial production in July 2013
dropped 2.1%, including 8.2% fall in Greece, 7.9% in Ireland and
7.7% in Malta, among others.
According to the VDMA Machine Makers' Association, German machine
tool orders in Jul 2013 plummeted 3.0% year over year. Domestic
orders grew by 10% while international orders were down by 9.0%.
Important Players of the Machinery Industry
Deere & Company's
) fiscal third quarter 2013 (ended Jul 31, 2013) results were
impressive. For the quarter, equipment sales rose roughly 4%, with
price realization contributing 3%. The agricultural and forestry
equipment provider is expanding globally to leverage benefits from
the growing global farm industry.
Management anticipates equipment sales to decrease 5% year over
year in the fiscal fourth quarter but increase by the same
magnitude in the fiscal 2013. Net earnings for the year are
projected to be approximately $3.45 billion, up from $3.3 billion
) posted a 17% decline in Machinery and Power Systems sales in the
second quarter of 2013. For the year 2013, the company expects
revenue to range within the $56-$58 billion range as against
$57-$61 billion expected earlier due primarily to the expectations
of weak demand for mining equipment and expected reduction in
CNH Global NV
) posted a year-over-year increase of 9% or 10% on a constant
currency basis in its equipment sales in the second quarter 2013.
Equipment sales comprised of 83% agricultural sales and 17%
construction equipment sales. For 2013, management anticipates
agricultural equipment unit volume in the market to increase 5% but
for construction equipment unit volume to be flat to down 5%.
Other top players in the agricultural, construction and mining
), among others.
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.
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.
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. Looking at 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
Considering results of all the companies within the Industrial
Products sector, it can be seen that results for this Zacks sector
in the second quarter 2013 were disappointing on a year over year
basis. Earnings fell 4.5% while revenue managed just a 0.6%
increase. Earnings and revenue beat ratios (percentage of companies
coming out with positive surprises) were 66.7% and 37.5%,
respectively in the quarter.
However, results exhibited a positive trend when compared with the
8.9% earnings fall and 0.5% revenue decline reported in the first
In a view of all the Zacks sectors combined, second quarter 2013
results were dominated by the finance sector which drove the
overall earnings growth to 2.5% year over year. Excluding finance,
earnings in the quarter registered a 2.9% fall. Sectors that
dragged the results were Oil/Energy, Basic Materials, Technology,
Industrial Products, Conglomerates, Medical and Consumer Staples.
Going forward, the trend seems positive for the Industrial Products
sector, as the earnings decline is anticipated to further contract
to 1% in the third quarter 2013 while earnings growth of 15.8% is
expected in the fourth quarter. For 2013 and 2014, earnings growth
of 1.6% and 10.8%, respectively are expected.
Revenue growth is likely to remain same in the third quarter but to
increase slightly in the fourth quarter. For 2013 and 2014, revenue
is anticipated to grow 0.8% and 3.3%, respectively.
For more information about earnings for this sector and others,
please read our '
Fiscal government expenditures play a counter-cyclical role curbing
the ill effects of slower economic developments and a tight credit
market. China's structural stimulus package, government spending on
social welfare, construction of low-cost housing, completion of
infrastructure projects on agriculture, forestry and water
resources received special attention.
Also, 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 the infrastructure projects. Approximately $260 billion
will be allocated to fund roads, bridges and highway projects over
Russia, which became the World Trade Organization (WTO) member in
2012, will open the gates for companies worldwide to benefit from
the growing needs for modernizing the agricultural, transport and
infrastructure sectors of the economy.
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 of
Research and development costs are 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 bring stability to
their own economies.
Favorable commodity prices are a boon, although government policies
affecting prices along with export and import policies and trade
relations with other countries impact the machinery industry.
Conclusion: Prospects Bright
Despite the prevailing global uncertainties, rising needs of better
infrastructure, modernized methods of agriculture and growing
complexity of mining/manufacturing methods will boost demand for
technologically advanced equipment in these industries. Moreover,
looking ahead, the growth path widens for the emerging and
developing nations, which will inevitably be attractive
destinations for machine makers worldwide.
CATERPILLAR INC (CAT): Free Stock Analysis
CNH GLOBAL NV (CNH): Free Stock Analysis Report
DEERE & CO (DE): Free Stock Analysis Report
ILL TOOL WORKS (ITW): Free Stock Analysis
MANITOWOC INC (MTW): Free Stock Analysis Report
TEREX CORP (TEX): Free Stock Analysis Report
TORO CO (TTC): Free Stock Analysis Report
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