Oddly enough on a day, August 31, when investors are again feeling nervous about growth, machinery stocks are showing relative strength. Among the standouts Caterpillar (CAT), Joy Global (JOYG), Bucyrus (BUCY), and Deere (DE).
This group has been through a day much like this not so long ago. On August 12 the same stocks were up—with the exception of Caterpillar, which was down slightly. Caterpillar  (CAT) was the catalyst for the strong showing that day by the sector. On the morning of August 12 the company announced that it would triple the production capacity of its U.S. excavator lines and add 500 more employees with the opening of a few plant in Texas. Caterpillar said that plant will be operation in mid-2012.
Now, of course, Caterpillar’s optimism about its business may be completely misguided or wildly early, but it echoes news from other machinery companies: If your customers are other companies with long-lead times between breaking ground on a mine or an airport or a communications network and having them go into use, then you’re actually seeing an increase in business. That’s been the story at a company such as Cummins (CMI) and at Intel (INTC).
Today, August 31, the catalyst looks to be earnings from Joy Global due before the open tomorrow. The thinking among analysts is the company will beat modest expectations for the current quarter and then predict strength for the fourth quarter, which is typically the strongest of the year.
One stock that isn’t in today’s list of leaders but that will be a major beneficiary of this trend is Komatsu (KMTUY.PK), the world’s second largest construction-equipment maker. Like all other Japanese exporters, Komatsu has seen its shares hammered by the ever-climbing yen. A stronger yen threatens to price Japanese products out of markets from cars to cameras. The stock is down a little over 2% today.
But if the yen ever turns around—and it will if and only if the U.S. economy shows signs that it’s headed toward economic recovery rather than a new recession–I think Komatsu becomes a very interesting pick in the machinery sector.
In July the company announced plans to double production in the fiscal year that ends in March 2011 to meet demand from China and Indonesia. Production will climb to 85,000 building and mining machines compared to 44,000 in the previous fiscal year, executive officer Masahiro Uegaki told Bloomberg that month. That projection was about 60% higher than the company’s prediction in April.
In July the company raised its forecast for first half profits—that’s the period from March 31 through the end of September—by 41%.
Typically for a depressed cyclical stock coming off a bottom Komatsu trades at a horrendous 55 times trailing 12-month earnings but at just 12 times projected earnings for the 2012 fiscal year.
If the turnaround the Komatsu is forecasting actually materializes, this is one cheap stock. I’m adding it to Jim’s Watch List today.
The stock is down about 6% from the beginning of the year.
ryan,
Read what I say, and prove me wrong. I’m more than delighted to admit when I’m wrong. I wonder if you are?
Ed, thanks for the reply. Each time you do so you manage to show in a new way just how shallow your analysis is and I think that is helpful for the people who read this blog and might be tempted to actually take your advice.
surf..of course you are right over time but that was not the point. There is no way to know for sure what a stock will do right after the exdate but in a taxable account buying a stock right before a dividend provides no theoretical value whatsoever and does leave you with a real world taxable event. That does not mean you should or should not buy the stock. It simply means that you should not think you are getting extra value simply by timing your purchase near an exdate. Tazman was right about that and if you read Graham (I hope you do) you will see this to be true.
There is one other factor in dividend stocks to be considered. Reinvesting dividends can unbalance your portfolio over time. The only way to rebalance your portfolio is to…sell some of the stock. And then you are back to square one, paying taxes on those dividends, as well as an extra transaction fee.
ryan,
Taxes don’t eat the entire dividend, at least not where I’m from. If dividends are such a burden, why would you EVER buy a dividend-paying stock?
Let’s say a dividend pays you $100. Do you EVER pay more than $100 in taxes on that dividend? Do you pay anywhere close to $100 in taxes? If you do, you need to quit doing your own taxes.
By the way, when you collect your dividend in cash, as opposed to reinvesting it, you still have the same amount invested as you did before the dividend was paid (plus or minus any movement in stock price). Explain how money is “coming off the table”?
Methinks you need to post less and learn some basic math.
ryan, tazman,
Got to agree with Ed on this one. Especially in this market, I’ll take the dividend. Your assumption is that the stock loses value that never returns to the stock. Untrue. There is value in a stock that pays a dividend because it pays a dividend. At the precise moment that the stock passes the ex divi date the value may drop, but from my experience, the value returns fairly quickly. I also think the likes of Graham and Buffet would take issue with your logic and I would happily put their track record against anyone’s, any day.
Ed McGon, I’m with tazman wondering how taking a dividend right away, paying taxes on it, and having your position reduced in value by the gross dividend is a profit? All you have done is take some money off the table and paid taxes on it. Where is the profit?
Methinks you should post less and learn more.
Ed,
Do you think if Rebuplicans take at least the House that this will bode well for stocks like ITT and GD because less likely they will cut defense budget? Any thoughts on EMR?
jamba,
tazman had a good suggestion with ITT. java12jack brought up ITW, which is also a good one (arguably the best, although close to fairly priced).
The only one I’d add to the list is GD, but that’s only if you think the defense sector will get a lift in the near future. Some people think a big war is inevitable to get us out of this economic slump (it worked for FDR didn’t it?). Personally, I think there are better ways, but they run counter to the beliefs of our current administration, so war might be inevitable. It is hard to say at this point.
Ed,
Thanks for the HIHO info, but it looks like you prefer US industrials…any names in particular?
Java12Jack,
Wouldn’t touch ASDK right now. Their sales are going to continue to stay flat with a better chance for a downward revision than an upward one. Developer engineering firms have been decimated and are not buying software right now. Those still around are most likely staying with their last version of Civil 3D. They probably have a couple of years before ASDK quits supporting it. Many other firms are holding tight on drafting software. Governments are certainly not updating. It is damned expensive and only marginally increases productivity, especially since the recent 3D versions are pretty good. The P/E on this stock is completely unwarranted at the moment. There is no dividend to keep you happy for 3-5 years for the stock to turn around. Just my 2 cents…
tazman,
I fully agree that an American industrial company would be a better play. But that wasn’t what he asked for.
As for the “taxable event”, that event is a profit made right away. Feel free to explain how a profit is bad?
Ed……still don’t see how it is lucky to have a taxable event reduce the value of your holding right after you bought it. Is that some kind of “emerging” luck?
Doesn’t have to be a foreign company to take advantage of emerging markets. ITT sells plenty in emerging markets and has the added advantage of being American, with the transaction costs, accounting, reporting, and political standards that implies. A much safer bet for the type of person I’m seeing on this board.
tazman,
It’s lucky if that is the stock that Jamba wants. If you find a stock you like, and it happens to be right before the ex-dividend date, then all the better.
He didn’t ask about American industrial stocks. He wanted emerging market industrials that paid a dividend. That is a VERY narrow field.
Ed….How is it lucky that the ex dividend date is 9/24 since the stock will drop by the value of the dividend on that date. Surely you don’t think you can just buy stocks before the exdate, clip the dividend, and still be even on the stock absent a market rally that is not related to the dividend? If only life was so easy.
Industrial stock that is undervalued right here in the USA paying just around 2.5%…. ITT. It is worth $55 and can be had for $44 even today. Be wary of Chinese stocks folks. Never forget that they are communists who will take your investment in a heartbeat if it suits them.
jamba,
You don’t ask for much? The best one I see is Highway Holdings from Hong Kong with a 3.72% dividend yield, although they only pay it once a year, and you’re in luck because the ex-dividend date is 9/24.
The financials are ok, although nothing special. But the best part is their stock symbol: HIHO. If you get the urge to whistle, I understand. 🙂
java12jack,
ADSK seems like a good company, but a little overpriced (P/E of 36 and a PEG of 2.4).
Hi Ed,
I am looking to add an industrial stock to my portfolio. One that has international/emerging market exposure and a dividend. What are your top picks?
Ed,
In the tech sector what are your thoughts on ADSK? No debt, pretty good economic moat, only thing is they have been hurt by housing sector, contrarian play?
java12jack,
I like the tech sector now, basically because of the temporary slowdown in the earnings projections. They have been hit hard with lowered 3rd quarter forecasts, which completely ignores the longer term growth potential in the sector.
Ed,
If you were looking at stocks which sectors do you think have been ignored/under invested by most investors? I remember buying CHK at $6 earlier in the decade because no one was interested in oil or gas stocks.
Cat is also opening a big plant in N.C. and has a huge presence in virtually every emerging market. Can’t go wrong with them…but it and hold it forever…when it drops, buy more.
I’ve been looking for a good buy on deere and cat.
Thanks for the article Jim!