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Modine Manufacturing Co. (MOD): Industrials and the Curse of the European Economy

Trouble in the European economy has posed threats to many industries and punished many companies in the form of declining profitability. Industrials have been no exception. However, in this situation, it will be interesting to analyze how different companies in the industrial sector are coping with this downturn.

An HVAC player

Modine Manufacturing Co.Normally, heating, ventilation and air-conditioning (HVAC) has less to do with how an economy is performing, given that it has become a necessity over time. However, this doesn’t seem to be the case with Modine Manufacturing Co. (NYSE:MOD) , which installs HVAC systems in both buildings and automobiles.

Perhaps a recessionary economy leads to less construction and low car sales, hence one can make sense of why Modine Manufacturing Co. (NYSE:MOD) has seen its profitability declining in Europe over the last two years or so. The company’s stock traded at one point in time (April 2011) at a notch below $18. However, it is now trading at just above the $9 mark.

However, Modine Manufacturing Co. (NYSE:MOD)’s investors have been excited about the company’s broad plans to turn around its business, which includes expansions in Asia and South America; a shift to trucks (from autos) in Europe and North America; and restructuring activities, which will now focus on Europe for the next two years.

That said, fiscal Q4 2013 EPS guidance of $0.18 to $0.22 seems a bit aggressive as market conditions have changed little and the company delivered only $0.22 of EPS in the first three quarters of FY’13.

Woes of a truck brand in Europe

PACCAR Inc (NASDAQ:PCAR) is better known as Kenworth and Peterbilt (the truck brands through which it operates) in Europe. Over the last two years, the stock has been punished for its large exposure to Europe. Europe’s exposure has been the main culprit behind the fact that the year has gotten off to a slow start for Paccar and not at a pace that would help company to meet management’s guidance of +5% expansion in the bottom line in 2013. In fact, it seems a faraway possibility to reach consensus EPS estimates of $3.17 given that EU registrations are down more than 30% since the start of the year.

That said, North American orders have begun to stabilize. Housing starts and auto production are supportive of truck replacement demand in the U.S. Also, freight tonnage recently reached a 10-year high, which is a bullish catalyst for Paccar.

Historically, Paccar has traded at a higher-than-peer multiple at trough and a lower-than-peer multiple at peak; its mid-cycle multiple was higher than its less-cyclical machinery peers. Given limited upside available in both the North American and European truck markets, Paccar will approach a peak multiple on possible trough EPS. JPMorgan Chase & Co. (NYSE:JPM) has set a price target of $47, which reflects a forward P/E of ~14x on a revised 2014 EPS estimate of $3.58, discounted back one year.

This company is a pure-play on construction activity

Terex Corporation (NYSE:TEX) has been supplying construction machinery to Europe over the last decade or so. The company currently makes 28% of its revenue from Europe. Terex Corporation (NYSE:TEX) faces very tough comparisons in the first half of 2013, and uncertainty and the lack of visibility in Europe have sent waves of anxiety among the investor body.

However, two data points from the last conference call (in April) have sent bullish signals to the market. Firstly, the company is doing good in the Aerial Work platform (AWP) business in Europe. The European business is witnessing a surge in replacement demand (up double digits). The second quarter is expected be a solid quarter as volumes are supportive of some strong growth. Moreover, the company has sold its road-building business and is selling its loss-making components business in Germany. The construction business is still struggling but divestitures will definitely help to bring improvement.

North America remains a solid market. The reconstruction following Hurricane Sandy has driven increased equipment demand in the rental channel. Moreover, continued recovery in U.S. residential construction has also boded well for the company.

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