Everyone’s worried about the state of the economy. I’ve been analyzing second-quarter results for many of the publicly traded machinery companies to look for clues as to how 2013 will turn out compared with 2012. I regularly track 25 or 26 companies, and although not all of them have reported quarterly results yet, some interesting trends are unfolding.
The companies closest to equipment users (customers) are doing fairly well; especially equipment rental companies. Equipment distributors are next in line with good results. Manufacturers are not doing as well.
I’ve isolated North American volume where possible so that we can compare manufacturer performance in North America with North American dealers and rental companies.
Only United Rentals and Hertz Equipment Rentals have reported second-quarter results. They are both doing extremely well. Distributors are doing almost as well with both revenues and profits up. Manufacturers are having a problem.
- Hertz Sets Record for Second Quarter, HERC Revenues Up 15%
- United Returns to Profit, Rental Revenue Up 5% in Q2
So far, all equipment manufacturers have reported down revenue (-4.3%) and lower profits (-7.1%). Sales incentives are starting to show up in the market, a sure sign that manufacturers want to boost retail sales. New machine warranties are being extended by several companies. Also guaranteed fuel savings are being offered by a few manufacturers. Case recently came out with the ProCare program that is designed to greatly reduce the risk of ownership for their customers.
Caterpillar said in their second-quarter statement that the company reduced inventories by $1.2 billion, and they were surprised that their dealers also reduced inventories by $1 billion. We have checked inventories reported by other manufacturers but haven’t seen much of a change compared with the second quarter in 2012.
Wall Street research firm Cleveland Research reported in their recent survey of Deere dealers: “We were surprised to learn that dealers continue to target inventory reductions as this was previously expected to be more aligned with demand by now. We are hearing some aggressive inventory de-stocking targets; up to 20 to 30 percent in some cases.”
Some of the slow-sales problem can be traced to our slow-growth economy. U.S. GDP grew 1.7 percent in the second quarter, which was slightly higher than expected. Government spending cuts due to the sequester were expected to slow second-quarter GDP growth more than that.
The housing market is inching up in fits and starts -- with starts up one month and down the next. Construction unemployment finally went below 10 percent for the first time since 2008. Members of the Associated General Contractors are starting to express concern that skilled labor may be in short supply because so many workers left the industry during the downturn.
All this economic uncertainty is slowing new equipment sales and boosting rentals. I also believe the trend toward rentals is being caused by high prices for new machines that comply with U.S. EPA’s Tier 4 Interim requirements. Prices for Tier-4-Interim equipped machines are up anywhere from 5 percent to 20 percent compared with Tier 3 versions.
Many government jobs require contractors to use the latest emission-compliant machines, especially in zones that don't meet EPA's air-quality standards (most urban markets). But for private construction jobs, a lot of equipment owners are opting to purchase used Tier 3 machines, rebuild their Tier 3 equipment, or rent machines when they need emissions compliance. Many small equipment owners with whom I have spoken say that while in the past they owned two machines of every kind -- one for backup -- now it’s more likely they will own one and rent another as needed.
Manufacturer improvement in order and production processes has also had an impact. Deere and Caterpillar have production systems designed to provide dealers with rapid build and shipment of machines. Those systems have reduced (not eliminated) the need for dealer inventories. Again, Cleveland Research said: “The moderating demand and higher-than-normal inventory levels is leading to shorter lead times from Deere.We now see lead times in the 30-to-60-day range in most cases depending on product category and order classification (retail vs. stock order).”
Most everybody continues to forecast optimistic outlooks for the second half of 2013. One manufacturer’s rep told me he thinks that if 2013 is flat compared with 2012 he will consider it a good year. I think that is as good an estimate of how 2013 will turn out as any I can come up with.
* Manfredi’s analysis is based on results from
- These equipment manufacturers: Astec Industries, Caterpillar, Deere, Joy Global, Komatsu North America, Manitowoc, Oshkosh, Terex, Toro and Volvo CE.
- These equipment distributors: Cervus, Titan Machinery, Toromont and Wajax
- And these rental companies: United Rentals and Hertz Equipment Rental