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Global Market Scan: Heavy machinery demand pullback points to global construction weakness

Dmytro Konovalov
Global Market Scan: Heavy machinery demand pullback points to global construction weakness

Demand for heavy machinery is a meaningful indicator of trends in regional and global construction. Caterpillar and Komatsu are important players in the sector with market capitalizations of approximately $74.2 billion and $20.4 billion respectively, as of Feb. 11.

Recently, both companies reported quarterly results and provided insight on their businesses for the whole of 2019. For investors, their management teams also presented outlooks for 2020, based on expectations for infrastructure development and potential demand for construction equipment in global markets.

Financial results reported by Caterpillar and Komatsu show a significant decrease in sales and lower profitability compared to the previous year. The decline in sales started in the second half of 2019 and is likely to continue in 2020 as indicated in published management guidance.

Both Caterpillar and Komatsu witnessed a weakening of demand for heavy equipment in North America. At the same time, demand for construction equipment in Asia went down for Komatsu and remained flat for Caterpillar. The negative impact of the coronavirus on the Chinese and global economies is likely to undermine the already weak demand for heavy equipment in Asia.

Based on the results for the last quarter of 2019 and the outlooks reported by Caterpillar and Komatsu, the health check for global construction indicates a further weakening of the industry, at least for this year.

 

Caterpillar

Caterpillar’s financials for 2019 show slowdowns in sales volumes primarily in the company’s construction and energy and transportation segments. The full-year results were hit by a weak Q4.

In the last quarter, Caterpillar’s sales and revenues dropped eight per cent year-over-year. The company’s sales and profit in the construction segment were down by 12 per cent and 22 per cent respectively relative to Q4 2018. This came on the back of negative trends in dealer inventories and unfavourable prices.

Sales were lower in North America and EAME (Europe, Africa and Middle East); remained flat in the Asia/Pacific region; and were higher in Latin America, as a result of strong infrastructure and residential construction activity.

The company’s Q3 sales were also down, by six per cent year-over-year. The negative sales and revenue dynamics in Q3 and Q4 came after relatively strong results in the previous two quarters. The company’s sales were up three per cent and five per cent in Q2 and Q1 respectively.
Caterpillar’s sales and revenues for the whole of 2019 dropped by approximately two per cent or $0.9 billion year-over-year. According to the company, this resulted from lower heavy machinery and equipment purchases by dealers, even though end-user demand went up by two per cent.

In its full-year 2020 outlook, Caterpillar’s management provided conservative guidance, projecting a decrease in the company’s sales and profitability. “We expect continued global economic uncertainty to pressure sales to users in 2020 and cause dealers to further reduce inventories,” said Jim Umpleby, CEO and chairman of the company. The sales projections are based on an expected decrease in end-user demand of between four per cent and nine per cent and a decline in dealer inventories of between $1.0 billion and $1.5 billion.

Likely, the negative effect of the coronavirus on the global construction industry would further depress the outlook. Approximately 10 per cent of the company’s sales come from China and heavy equipment demand in the country this year will be lower than projected due to a weak Q1.

Caterpillar has multiple facilities in China. They stayed closed for an extra week after the Lunar New Year break. Most of them reopened only on Feb.10.

 

Komatsu

Like Caterpillar, Komatsu’s financial results show an ongoing slowdown in its business segment related to global construction. The company’s fiscal year terminates on March 31 and hence the last three months of 2019 represent a Q3 for Komatsu. The overall sales for Q3, reported by the company at the end of January, were down 12.4 per cent compared to the same period a year ago.

Net income in the company’s Q3 dropped 23.1 per cent year-over-year. Even though the previous two quarters were stronger, the overall sales and net income for the nine months ended December 31, 2019, were down by 9.5 per cent and 26.6 per cent respectively. The profitability for the construction, mining and utility equipment division in the last quarter of 2019 dropped to 9.7 per cent from 13.7 per cent a year ago.

The construction, mining and utility equipment segment provides approximately 92 per cent of the company’s sales revenues. According to Komatsu’s presentation, in this segment, “Sales decreased from the corresponding period a year ago, adversely affected by reduced sales volume and foreign exchange rates. Segment profit declined, mainly due to reduced sales volume and a change in the geographic composition of sales.”

Komatsu’s management has issued guidance that the company’s sales and net income for full 2019 (ending on March 31, 2020) will decrease by 9.3 per cent and 29.8 per cent year-over-year respectively. The weak performance results from the decrease in quarterly sales of the construction, mining and utility equipment division in Asia (including China), followed by North America and Japan.

As in the case with Caterpillar, the negative effect of the coronavirus on Chinese and other Asian economies is likely to exacerbate Komatsu’s weakening sales of heavy machinery.

Dmytro Konovalov has over 10 years of experience in equity research and analysis for global markets at leading international financial institutions.

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