Investing in the Construction Machinery Industry

Construction Machinery Industry
Construction Machinery Industry

Construction machinery companies generate billions of dollars each year. Household names such as John Deere and Caterpillar manufacture an array of equipment that building companies use. Excavators, earth movers, cranes, and front-end loaders are just a few examples of the construction machinery these companies produce. As an investor, you could earn a substantial, consistent return if you learn how to invest in the sector properly. 

A Closer Look at the Construction Machinery Industry

In terms of market capitalization and revenues, the construction machinery sector is one of the biggest in the world. For example, Caterpillar alone generates tens of billions of dollars in revenue every year. Lesser known companies like Zoomlion and Terex generate well over $5 billion annually. Caterpillar and John Deere have market capitalizations well in excess of $60 billion and $30 billion respectively. 

Key Components

Construction machinery manufacturers sell their equipment using distributors. The distributors then sell the machinery to customers. So, much of what companies like Caterpillar and Deere earn depends on how well distributors handle their own inventories. 

For example, if a distributor buys too much equipment when demand from customers is low, the distributor will need to try and sell that same equipment at another time (possibly the next quarter) when demand improves and adjust their inventory accordingly. 

This shift in the supply chain can hurt the bottom line of companies that manufacture the machinery from quarter-to-quarter. The bottom line is a company could take a huge hit on its quarterly statement if a distributor buys too much supply from manufacturers during a period of low demand. Essentially, the industry is cyclical and fluctuates based on certain economic conditions. 

Key Drivers

Since the economy drives much of the industry, it tends to do exceptionally well when economic conditions are favorable. When times are lean, the construction industry takes a hit, and the need for machinery and equipment deteriorates. 

However, some governments will inject money into the construction industry during recessionary times to support economic growth and keep public projects going. So, there is room to make money during economic slowdowns depending on what local, state and federal governments are willing to spend to prop up their economies. 

The problem is governments increase their debt burdens during economic slowdowns and often become hesitant to inject money into the industry during a recession. In an effort to thwart their reliance on governments, more companies are looking to the public sector for investments. 

During times of economic prosperity, the construction machinery industry is a great investment. During lean times, investors need to hedge against potential risk if they have a large portion of their portfolio committed to the construction machinery sector. 

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