Deals in Construction-Equipment Stocks

Stocks of construction-equipment makers seem particularly productive waters for bottom fishing. Their shares have been blasted as evidence of a weakening economy mounts. That's because making heavy machinery is a highly cyclical business that tends to decline as the economy slows. Less construction means less demand for bulldozers, cranes and dump trucks. The on-going collapse of the U.S. housing market has exacerbated the decline of construction-equipment stocks.

Two battered equipment stocks are worth a look, as is one that has remained relatively unscathed. Terex (symbol TEX), Manitowoc (MTW), and Bucyrus International (BUCY) manufacture equipment needed to extract commodities, such as oil, copper and coal.

They are all international firms with small exposure to U.S. residential construction. Each company has amassed a backlog of equipment orders. That makes it easier to forecast sales for the coming year. And as demand for commodities rises in developing countries, these manufacturers will sell more to producers eager to expand their mining and drilling operations.

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Terex has offset weak demand in the U.S. for some of its products with more sales of mining equipment overseas. In the fourth quarter of 2007, sales of its mining equipment, trucks in particular, rose 51% to $653 million. The company plans to open a factory in India and two plants in China this year to keep pace with demand.

Terex has a $4.2-billion backlog of orders for its cranes, road-building equipment and scissor lifts. More than 70% of its $9.1 billion in sales last year came from foreign countries.

The stock has fallen 29% from its July high of $96.94. It closed at $67.45 on February 29 and trades at 10 times the average analyst earnings estimate for 2008 of $6.91 per share. (Machinery stocks have an average price-earnings ratio of 15.) Credit Suisse analyst Jamie Cook says Terex will beat those expectations because of strong demand for cranes and mining equipment. He estimates that the company will earn $7.25 per share, gives the stock an "outperform" rating and a 12-month target of $80.

The story is similar with crane-maker Manitowoc. About 60% of its annual revenue of $4 billion comes from international sales. Bank of America analyst Seth Weber says crane sales to emerging markets, such as China, India and the Middle East, will top $1 billion in 2008.

Manitowac, with its $2.9 billion backlog, expects demand to remain strong at least until the end of the decade. (It has already booked some orders for 2009.) The backlog is firm because the company hasn't had a customer cancel an order since 1983. The revenue Manitowoc generates from crane sales breaks down this way: 25% from power plants and utility companies, 21% from oil and gas projects and 16% from road and highway construction.

Manitowoc has beat earnings estimates 11 out of the past 12 quarters. The stock, down 21% since December, closed at $40.73 on February 29. It trades at 12 times the $3.41 per share that analysts expect the company to earn this year. Weber rates the stock a "buy" and has a 12-month price target of $53.

The stocks of Manitowoc and Terex move in tandem. So a setback for one company will affect the other's share price.

Bucyrus is slightly different animal. While the other two companies also make equipment used in building and road construction, Bucyrus focuses almost exclusively on supplying the mining industry.

Lehman Brothers analyst Joel Tiss says the boom in coal, copper and Canadian oil sands has legs at least until 2011 and that bodes well for Bucyrus. Those markets represent about 90% of the $1.6 billion in sales Bucyrus generated last year. Less than 30% of the company's revenue came from the U.S., and it has a $1.4-billion backlog of orders.

The stock, which fell 5.6% to $99.88 on February 29, is trading 8% off its 52-week high and is still relatively pricey. It trades at 20 times the $5.05 per share that analysts expect the company to earn in 2008.

Tiss rates the stock an "overweight" and has a 12-month target price of $115. But if Bucyrus can achieve the 65% earnings growth that Tiss forecasts for this year, the stock may be worth the price.