Equipment lift-off

01 May 2008

January through mid-August 2005

January through mid-August 2005

The price of oil scaled a new high of $66 a barrel in mid–August, and, having such a fundamental impact on infaction and economic growth, this spike had an inevitable impact on the stock markets.

Major indexes, for example, the DOW, NASDAQ and S&P 500, held their ground, and there is some encouragement to be taken from the fact that they at least did not fall back in the face of this unfavorable development.

Far more encouraging was the bullish performance of the heavy equipment sector, which shot up on the back of strong half–year results–as the graph shows, ACT's Heavy Equipment Index (HEI) enjoyed the steepest growth in its short history in the mid–July to mid–August period.

Although those in the heavy equipment industry have been saying how buoyant business is these days, there does seem to have been an element of pessimism on Wall Street, or some sort of doubt at any rate. As a result, when half–year financials came in above expectations, share prices adjusted sharply upwards.

The figures, of course, speak for themselves. Terex Cranes’ sales were up 32% in the first half of the year, compared to H1 2004, and its order backlog was up 10%. Indeed, the company announced that it was adding another production shift at its Waverly, Iowa factory.

Manitowoc Crane Group (MCG) sales were up a similar percentage–34% higher compared to the first half of 2004. The company's backlog was also strong at $530 million–50% higher than it was at the end of 2004.

Most important of all though is that proftability in the sector is improving, and that is the key factor that drives share prices higher. MCG's operating margin improved to 7.1% of sales in the first half of the year–a lot better than the 4.8% margin achieved in H1 2004.

Terex's overall operating margin was 6.6% of sales, again an improvement on the previous first half's 5.2% benchmark. However, the crane segment's margin slipped from 3.8% to 3.4%. According to Terex Cranes president Steve Filipov, sourcing initiatives and the second shift at Waverly should help the situation, by reducing overheads and speeding up production of more recently ordered (higher priced) cranes.


The story that the two major crane manufacturers’ financials paint is similar across the industry, and this has helped the ACT HEI put on a net gain of 11.87% in the year to the end of week 32. This is head and shoulders above net gains over the same period for the mainstream indexes such as the Dow (+0.52%), NASDAQ (+1.21%) and S&P 500 (+4.21%).

Interestingly, Gehl has been the best performing share in the sector. It went from just over $22 at the start of the year to higher than $50 in mid–August–about a 130% gain. The company's sales were up 43% in the first half of the year compared to H1 2004 and operating profts were up an impressive 73%.

All this data serves to underline the incredible buoyancy of the heavy equipment sector–sales were up about 26% across the sector in the first half of the year, with profts up 39% for an operating margin approaching 10%. The high order backlog level in the industry would indicate that there is more good news to come, and it is to be hoped that profts can improve further too.


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