Back in (the) black

Shares in US heavy equipment manufacturers enjoyed a few weeks of good gains in April, thanks to strong first quarter numbers for many of the key players in the sector. These pushed the index to a new all-time high of 165.6 points, eclipsing the previous record of 161.3, which was achieved just prior to last May's market correction.

Arguably the most significant results announcement this spring came from Caterpillar, the clear global Number One in the heavy equipment market. The company had a record first quarter, but more significantly it has also raised its forecast for the year on the strength of the improving business conditions it sees around the world.

Caterpillar says its full-year sales will be between $42 billion and $44 billion, having previously forecast sales of $41.5 billion to $43.6 billion - about level with 2006. It has also upped its profit forecast to between $5.30 and $5.80 per share, compared to the previous guidance of $5.20 to $5.70 per share. Last year it earned $5.17 per share.

Cat is very much a bell-weather of the equipment industry for analysts. It is one of the 30 companies that make up the Dow Jones Index, and so what it says in its results and outlooks inevitably has a knock-on effect for other manufacturers in the industry.

Little surprise then that most of the companies that make up the ACT Index saw steep rises in parallel with Caterpillar's, with useful gains for the likes of CNH and Gehl.

But there was more at play than the ‘Cat effect.’ Terex's shares went absolutely stratospheric in late April, on earnings per share (EPS) figures that were 45% higher than for Q1 2006, and 18.8% higher revenues. These new highs have pushed Terex's market capitalization up to around $8 billion - a figure that would have been unthinkable 10 years ago.

Longer-term

While shares have rallied in recent weeks, the ACT HEI still lags behind the mainstream indicators over the longer term. As our graph shows, its net gain for the 12 months to date is only about 4.4%, compared to about 10% for the Dow, or more than 15% for the NASDAQ.

The cyclical stocks that make up the ACT HEI fell further and faster than the mainstream indicators when the markets slumped last May, and the pessimism over residential construction has been something of a brake on their growth since then. However, the recent jump in prices could herald another mini boom in the sector, which may see the ACT HEI accelerate away from the Dow, S&P 500 and NASDAQ once again.

Another key factor that will help is the continuing depreciation of the US Dollar against the Euro and Pound. With interest rates looking like they will go up in Europe over the coming months, compared to a flat to bearish outlook in the US, the Dollar seems likely to slide further this year. This will make life easier for exporters targeting Europe, with their products being cheaper in local currency terms, allowing them to discount prices, or make more profit.