Here's a copy of the Nepeague Letter by Bob Davis. He talks about the Ag sector. His website is at
nepeague.com
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. THE NAPEAGUE LETTER
Sunday, December 20, 1998
Editor: Bob Davis napeague.com
Overview of The Construction & Agricultural Machinery Industry
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The Construction & Agricultural Machinery industry segment has been under
substantial pressure over the last several months, as the result of recent
earnings weaknesses among the major participants, and the perception that
this segment will be badly hit by a slowdowns both in exports to emerging
markets, and in domestic agriculture here in the U.S. There is a reasonably
strong belief in the investment community that it will be some time before
this overall segment recovers.
The specific problems in this sector lie in two areas:
- The slowdown in "emerging economies", which has virtually halted the
export of Construction & Agricultural Machinery; in fact, several of the
major participants in this category are facing cancellations of major
orders for which production has already been completed, and competition
from a "gray market" in equipment that was previously exported and is
now being "re-imported" to the U.S.
- U.S. domestic grain agriculture, where both international and domestic
demand has declined substantially, reducing the need for new farming
equipment. The decline in domestic demand is largely driven by reductions
in the export of beef and pork.
Although the overall segment looks weak, there are some offsetting positive
trends which should ultimately help certain Companies in this industry segment
to thrive in the coming year. These include:
- Lower interest rates which allow purchasers to more easily finance machinery.
- The continued strength of certain types of agriculture, especially in the Dairy
Industry.
- The ongoing soundness of the U.S. domestic economy, and the continued expansion
of demand for "plant & equipment" and for new housing.
- New governmental initiatives to upgrade the U.S. transportation system.
The purpose of this Overview is to identify which Companies in this Industry
Segment are positioned to avoid these problem areas and take advantage of
these positive trends, and thus continue to thrive in the coming year, even
in the face of an economic slowdown.
This industry segment is highly fragmented, as the result of the wide range of
potential product lines, its geographic and industry-specific distribution
system, the use of similar equipment in different industries, and the fact
that no major companies have market dominance.
Even though Caterpillar is the largest participant in the Construction
Equipment segment, it has only a 25% share of the overall world market
estimated at $22.2 billion in 1997, and it does not participate in many
product lines. More than 200 US production-equipment companies in the
construction sector serve the general construction and housing industries,
as well as the fields of road building, mining, materials-handling,
energy, and forestry.
The Agricultural Machinery segment has grown in recent years, reaching an
estimated $15.1 billion in sales in 1997, as farming became increasingly
mechanized in developing countries. However, the collapse of Asian and
Russian economies, and the resulting impact on domestic grain farming,
is impacting sales in this segment.
Although economic weaknesses in certain of the industries that it serves are
hitting the Construction & Agricultural Machinery industry heavily, other
customer-segments are continuing to thrive:
Everything is not completely bleak in the agricultural area, with produce
and especially the Dairy Industry showing continued strength, as shown by
reports from the U.S. Department of Agriculture, links to which can
be found on the Napeague web site.
The recent passage of key legislation will provide more capital funding
over the next few years for the transportation infrastructure in the United
States. The Transportation Equity Act for the 21st Century provides for
$167 billion in highway spending both for improvements and for new roads
and $36 billion for mass transit. More information can be also found on
the Napeague web site.
The overall construction industry continues to be strong, creating
additional demand for new and upgraded equipment.
One generally does not think of the Construction & Agricultural Machinery
industry segment as "innovative" or "hi tech". However, growth in this
segment has been fueled by several different technological innovations
which have resulted in more versatile equipment which is better suited to
a wider range of businesses. These innovations include the Skid Steer Loader
and the Rough-Terrain Forklift; more information about both can be found
on TNL's web site. |
