英文_高盛_机械_基础设施_可持续技术_在三年供应拐点中增加对机械的配置；评级变化_39页_1mb

Summary of Machinery, Infrastructure, Sustainable Tech Report

Core Content

This report outlines a positive outlook on the Machinery sector, particularly in the context of a three-year supply cycle inflection. The analysis focuses on the shifting dynamics in supply, demand, and valuation across key sub-sectors such as Construction Machinery, Ag Machinery, and Truck Machinery, with specific emphasis on Cummins Inc. (CMI), Terex (TEX), and other related companies. The report highlights the structural improvements in unit profitability, the impact of supply chain adjustments, and the re-rating of stocks based on improved market conditions.

Main Views

• Machinery Supply Cycle Inflection: The Machinery sector has experienced a positive inflection in the supply cycle, with new equipment destocking nearly complete, margin expectations reset, and valuations appearing reasonable on mid-cycle earnings.

• Shift in Preference: The firm has shifted its preference from Environmental Services & Construction Materials to Machinery, citing a better risk-reward profile and structural improvements in the sector.

• Rating Changes:

  • Upgrades: Cummins Inc. (CMI) and Terex (TEX) are upgraded to Buy from Neutral.
  • Downgrades: KBR (KBR) and Atmus Filtration Technologies (ATMU) are downgraded to Neutral from Buy.

• Key Drivers for Machinery:

  • The used market represents 10x the number of units as the new market.
  • Used inventory changes predict total market shortage/surplus up to a year in advance of production adjustments.
  • Machinery depreciation (10% per year) allows for supply adjustments to disconnect from end demand.

• Positive Outlook on Construction Machinery:

  • Used inventories are declining year-over-year, with a notable drop in sleeper truck inventory levels.
  • The firm sees a cyclical recovery with improved supply conditions and lower inventory levels.

• Positive Outlook on Ag Machinery:

  • Used inventories are down -3% yoy, following a sharp decline in new equipment demand.
  • Deere has been destocking dealer inventories for six consecutive quarters, indicating a potential market turnaround.

• Truck Machinery:

  • US truck production expectations have been reduced, with used inventory levels significantly down.
  • Freight trends are stabilizing at low levels, suggesting a more balanced market.

Key Information

Cummins Inc. (CMI) Upgrade to Buy

• Reasons:
  • Structurally higher Power Systems profitability.
  • Reduced EPA 2027 regulatory risk.
  • Declining used sleeper inventory levels (-30% yoy).
• Valuation: Trading at 16x mid-cycle EPS estimate ($20.50), with potential to trade at 14x if margins improve.
• Performance:
  • Power Systems margins have expanded to 15-20%, up from 5-10% historically.
  • Data center investment has grown to 33% of Office construction spending in 2024, up from 13% in 2019.
  • The firm estimates CMI’s Power Systems segment contributes $1.5 billion in sales, or 24% of total revenue.

Terex (TEX) Upgrade to Buy

• Reasons:
  • Aerials segment earnings are bottoming in 1Q with a 30% production cut.
  • Used inventories are declining for the first time since December 2022.
  • Tariff headwinds are now embedded in estimates.
• Valuation: Trading at our price target, with a balanced cyclical profile due to the Environmental Services Group acquisition.

Atmus Filtration Technologies (ATMU) Downgrade to Neutral

• Reasons:
  • The stock has reached our price target.
  • Valuation re-rating has played out, with the stock now trading at 10x FY1 EV/EBITDA vs. 7.5x at the time of IPO.
• Performance:
  • The stock was up 93% since being added to the Buy List on June 20, 2023, vs. S&P 500 up 35%.

KBR (KBR) Downgrade to Neutral

• Reasons:
  • The firm prefers Machinery over Mission Technology Solutions exposure.
  • Low visibility in parts of Mission Technology Solutions.
• Performance:
  • The stock was up 114% since being added to the Buy List on June 3, 2020, vs. S&P 500 up 89%.

Valuation & Risks

• Machinery Valuation:
  • The firm believes valuations are reasonable on mid-cycle earnings.
  • Sell-side consensus % Buys is at the low end of the historical range for CMI and PCAR.
• Risks:
  • Tariffs on TEX’s Mexico footprint (estimated headwind risk of ~0.50).
  • Elevated new equipment inventories in vocational trucks.
  • Normalized inflation environment may affect the historical correlation between used inventories and stock performance.

Supporting Evidence

• Exhibit 1: Organic growth outlook by end market.
• Exhibit 2-6: Ratings distribution and historical correlations between used inventories and stock performance.
• Exhibit 7-10: Trends in used inventories, spot rates, and production levels.
• Exhibit 11-16: Correlations between spot rates, load-to-van ratios, and stock performance.
• Exhibit 17-21: Improved unit profitability in Power Systems and Components segments.
• Exhibit 22-27: Analysis of new vs. used inventory units and production trends.
• Exhibit 28-34: EPS improvements and margin expansions across cycles.
• Exhibit 35-46: Correlation between used inventories, spot rates, and stock performance.
• Exhibit 47-56: Revenue and margin trends across segments.
• Exhibit 57: Revised EPS estimates and valuation analysis.

Conclusion

The report reiterates a positive outlook on the Machinery sector, with a focus on supply cycle inflection, improved margins, and reduced valuation risk. The firm upgrades Cummins and Terex to Buy due to their improved performance and structural advantages, while downgrading KBR and ATMU to Neutral. The analysis is supported by extensive data on inventory trends, pricing, and historical correlations, suggesting a bullish stance on Machinery as a key investment opportunity.