Birthday bonus

25 April 2008

It seems that almost every month IC reports a new high for crane manufacturers' shares. Week 16 saw the magazine's share Index hit a new high of 430.3 points - up 13.74% from only a month previously.

It is also interesting to reflect that this record coincided with the fourth anniversary of IC's Share Index. Established in April 2002 when the base level was set at 100 points, the Index has gained an astonishing 330% in value over that period. Unfortunately ethical considerations mean IC's staff cannot invest in the companies reported on in this page - we just have to find other ways of funding our beachfront mansions.

But, joking aside, the performance of the lifting sector's shares over the last four years has been truly remarkable. The same period has seen blue-chip indicators like the DOW and FTSE put on much smaller net gains of 12% and 17%, respectively.

So why has the sector done so well? The simple answer is markets and management.

Demand for cranes and construction equipment hit a cyclical low in 2002. Finding meaningful statistics for the lifting industry is notoriously difficult, but new figures from Off-Highway Research for the general construction equipment market show that global demand grew 50% between 2002 and 2005.

The most significant rise came in the US (60%), but even sluggish construction growth in Europe has seen machinery sales rise 20% in the same period, and the equally weak Japanese market has grown 33%. These three territories are the largest markets for new construction equipment, accounting for about 70% of global demand.

Then there is China, where machinery sales are up just over 50% between 2002 and 2005. While this is positive growth the bulk of lifting equipment sales in China are domestically built, low capacity truck cranes. The established manufacturers have done well at the higher capacity end of the market, which in terms of China is anything over about 100 tonnes lifting capacity, but the actual volume of these machine sales is relatively low.

There is obviously a big gap between a 50% rise in the market and the 330% increase in crane manufacturers' stock market valuation, which brings in the second point of management. The sector has seen phenomenal consolidation in the last decade, with Manitowoc and Terex, in particular, buying-up numerous manufacturers in various states of financial distress. The Japanese manufacturers have also contributed with ventures like the Kobelco-Manitowoc supply agreement and the Hitachi-Sumitomo crane merger.

These deals have seen manufacturing streamlined and profitability improved, and it is profitability that the stock markets care about. It is a much leaner and more efficient industry than it was during the last peak of demand around 1999 to 2000.

Future

This raises the interesting question of where the markets will go now. On the surface, a 330% rise in four years is indicative of a bubble that will surely burst. The counter argument is that current market capitalisations reflect an industry that has got its act together, and that they are a fair representation of its worth.

It is a cyclical industry, and a downturn will come. The question is whether crane shares sink gently or crash.

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