Billionaire Ken Fisher’s 3 Heavy Machinery Industry Plays
As the economy recovers, investors can expect heavy machinery to really shine. Whether the companies in this industry make construction equipment or farming equipment, the need increases when the economy improves but a better economy also allows companies to be able to afford to upgrade equipment. After all, when the economy is weak or uncertain, many companies will hold off on sinking tens of thousands, if not hundreds of thousands, into machinery, preferring instead to make do as long as possible. The trick for investors is in to how best to play this phenomenon.
One way is to look to see what hedge fund managers are buying. Take Ken Fisher’s Fisher Asset Management for example (check out Fisher Asset Management’s top positions). The fund has three very large positions in heavy machinery.
Deere & Co. (DE): A discussion about heavy equipment companies would not be complete without mentioning Deere. The Moline, Illinois-based company is synonymous with agricultural equipment but they also manufacture construction equipment such as excavators, loaders and dump trucks. Deere is priced at roughly $79 a share. The company earned $6.75 a share. Analysts are expecting that number to rise to $8.02 a share this year and $8.51 a share next year, meaning that the company is priced at just 9.28 times its forward earnings. Overall, analysts expect Deere’s earnings will grow by an average of 10.83% a year over the next five years – a considerable discount to its industry’s average of 16.28%. Granted, its peers are priced higher, with an average forward price to earnings ratio of 12.65, but the difference in pricing is much less than the difference in earnings expectations. Ken Fisher’s Fisher Asset Management is a fan of Deere. The fund owned $353.26 million in the company at the end of the third quarter, but that was after cutting its position by 13%. I recommend this stock as a hold.
Caterpillar (CAT): The iconic Caterpillar logo is seen on many construction sites but the company does so much. It manufactures engines, turbines, mining trucks, forestry machinery, locomotives, etc. The company recently traded for $96 a share. Last year, it earned $7.93 a share. Analysts are expecting that number to rise to $9.83 a share this year and $11.47 a share next year, making Caterpillar’s forward price to earnings ratio 8.37. Looking at the next five years, consensus estimates put the company’s earnings growth rate at 17.50% a year on average, surpassing expectations for its industry in spite of having a much lower forward price to earnings ratio. Fisher Asset Management is also bullish on Caterpillar, as is Ralph V. Whitworth’s Relational Investors – and I have to agree. Caterpillar is a great stock with strong earnings growth and low pricing. I recommend this stock as a buy.
United Technologies (UTX): This company is extremely diverse in terms of the equipment it manufactures. United Technology makes everything from propeller systems for aircraft to industrial gas turbines, helicopters to fire extinguishers, heating systems to video surveillance equipment. The stock is trading for roughly $77 a share. It earned $4.75 a share last year. Analysts are expecting that figure to swell to $5.53 a share this year, moving to $6.71 a share next year. This means that United Technologies is priced at 11.48 times its forward earnings. Looking at the next five years, the rate of the company’s earnings growth is expected to average 12% a year. So, all in all, the company is priced higher than Deere or Caterpillar but has less expected earnings growth than Caterpillar. Fisher Asset Management owns a sizable stake in this company as well – so does Ric Dillon’s Diamond Hill Capital and Jim Simons’ Renaissance Technologies. For investors buying in now, I recommend looking elsewhere, like Caterpillar.