12 months to February 2009

12 months to February 2009

Weak fourth quarter results drove shares in the heavy equipment sector to an all-time low in early February. Chris Sleight reports.

Last month, I said investors were holding their breath for fourth quarter/ full year results, and that Caterpillar would be particularly closely watched to set the tone in the heavy equipment sector. So it proved.

Unfortunately Cat's fourth quarter results were weaker than expected, and the day of the announcement saw the ACT Heavy Equipment Index (HEI) lose more than 5 percent of its value to hit a new low of 68.23 points. The following days brought more losses, and it closed-out the month even weaker at 64.91 points.

At this level, the sector has lost almost 65 percent of its value compared to a year ago. Even more striking is the collapse from the all-time high of 211.04 points seen as recently as April 18 last year. This means that in the nine-and-a-half months since then to the new record low at the end of January, the sector lost close to 70 percent of its stock market valuation. It has truly fallen off a cliff.

It is also important to note that the equipment sector has fallen much more heavily than the mainstream market indicators. As our graph shows, rolling-year losses for the three most widely watched indicators, the Dow, S&P500 and NASDAQ are all down around 36 percent over the last 12 months, whereas the losses for the ACT HEI are close to double that.

This is to be expected in a classically cyclical sector like heavy equipment. Share prices rise above the market trend in the good times, but they fall sharper in a downturn as capital investment by buyers comes to a halt.

Stock markets essentially reflect future profit expectations, so the current level of the heavy equipment sector speaks volumes about how investors view the industry this year.

But that view can change given the right circumstances, and as ACT went to press President Obama's stimulus package was still working its way through Congress. Although the final figure was far from clear, the indications are that it will include at least $100 million in infrastructure spending this year, which would provide a major boost for the equipment industry.

Add to this the fact that the general economic picture is expected to improve towards the end of the year, and the current low in the stock market could prove to be the low for this cycle.

Of course the key word here is ‘could'. Just as good news like stimulus spending should lift the markets, more bad news on anything from economic output, unemployment figures or corporate collapses will have an adverse effect.

So it could be the right time to buy back into the sector, but it would be a brave soul that did so in what continue to be unpredictable and volatile times.

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