A country’s economic activity is the prime driver of its machinery industry’s demand. According to an IMF estimate, the world economy will grow 3.3% in the current year and 4% in the coming year. This will drive growth in the machinery industry as it focuses on activities like agriculture, construction, and mining.
In light of positive global economic trends, here is an analysis of three companies. While Deere & Company (NYSE:DE) and CNH Global NV (NYSE:CNH) primarily derive revenue from their agricultural machinery segments, Caterpillar Inc. (NYSE:CAT)‘s key revenue driver is its construction and mining equipment segment. These companies have framed strategies to benefit from improving macroeconomic factors, but will their strategies lead to sales growth?
Innovation drives expansion
Deere & Company (NYSE:DE) started a new 300,000 square-foot manufacturing plant at its Des Moines Works in Ankeny, Iowa. This plant will use the latest technology in farm equipment. The company has invested $85 million in this expansion. This plant will assemble sprayers, which are used to control weeds and apply nutrients. The plant already manufactures agriculture-related equipment for crop-care. With the contribution of this plant, the company expects quarter-over-quarter revenue growth of 3% in the third quarter ending in July.
In May, NavCom Technology, a wholly owned subsidiary of Deere & Company (NYSE:DE), launched a new feature, “StarFire Rapid Recovery” for its products. With this feature, NavCom’s Global Navigation Satellite System, or GNSS, will see an improved connection. GNSS is a system that supports the functioning of blades and buckets in agricultural equipment. With the help of this feature, GNSS will take 2-3 minutes to reconnect satellite signals, compared to 45 minutes previously, and will provide a supportive visual aid to machinery operators with the help of a satellite connection.
Helping farmers save time means helping farmers increase their production yield. The GNSS system has an impressive growth potential, as it is already used in 700,000 machines and is growing at CAGR of 12%. This will help the company to increase its revenue from its agricultural & turf equipment segment. It is expected that revenue from this segment will increase 8.9%, year-over-year, amounting to $29.54 billion in the current year.
The growing market for GNSS application
Merger opens new opportunities for growth
CNH Global NV (NYSE:CNH) recently announced SEC approval for its merger with Fiat Industrial. This deal will close in the third quarter of 2013. The merged company, CNH Global NV (NYSE:CNH) Industrial, will become the third-largest capital goods provider. CNH Global NV (NYSE:CNH) is already a leading company in agricultural and construction equipment with around 11,500 dealers in 170 countries, while Fiat is among the top companies in the capital goods sector and even does equipment marketing for CNH Global NV (NYSE:CNH).
This is a strategic merger, as CNH Global NV (NYSE:CNH) plans to expand its agricultural and construction segment. CNH Global generated revenue of $19.13 billion in fiscal 2012 and estimates growth of approximately $19.26 billion in fiscal year 2013. Moreover, Fiat reported revenue of around $33.64 billion in the previous year and expects revenue growth of 4% in the current year. These expected revenues will now contribute to the growth prospect of the new company.
Last year, U.S. farmers received pay outs from crop insurance and invested the funds in purchasing agricultural equipment. Thus, in the first quarter of 2013, the company reported a 26% year-over-year rise in earnings from its agricultural equipment segment, amounting to $469 million. It has further increased its inventory in its agricultural equipment segment, looking at the increasing demand in the second quarter.
This expectation is due to the approaching corn planting season in the U.S., which is the nation’s prime agricultural product.