Barclays Estimates Impact of Infrastructure Stimulus on Machinery Stocks - (CAT) (MTW) (TEX)

November 22, 2016 3:31 PM EST

Caterpillar machines are seen at a construction site in New York City, U.S., October 17, 2016. REUTERS/Brendan McDermid

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Barclays believes that the potential for a large infrastructure plan is real. However, details for a plan are still scarce, and the potential for offsetting impacts is very fluid. Using the economic census of construction, analysts are able to estimate the machinery content in various kinds of construction activity, including infrastructure.

Barclays analyst Robert Wertheimer commented, "Roughly 8% of the cost of a road is machinery, versus 1-3% of the cost of a house. Dollars spent on infrastructure punch above their weight in driving machinery demand. Water and sewer construction is a similar 8%, versus 3% on a commercial building. We spend months asking various levels of construction contractors these questions at one time, and generally even the general contractors didn't have a clear view, as many of the costs subcontracted out. We used the once every five years census data to sort through this all, adding up both machinery rental expense and machinery depreciation"

Barclays believes that Infrastructure is probably closer to 45% of machinery demand. However, compared with total construction dollars, infrastructure is only 14% of US dollars spent, or $167 bn out of the total of $1.15 trillion. Of that infrastructure segment, direct federal spending in census data is $8.1bn, state and local is $145bn, and private is $13.1B.

Residential construction is probably 25% of machinery demand or use. Barclays only lists residential that high because they are counting the estimated infrastructure associated with residential community construction, much of it private and not effected by a stimulus. Non residential building and other is likely 30% of equipment demand.

Wertheimer continued in a note, "this does not, as yet, mean we see a material increase in our estimates coming. Negative factors include upcoming record low replacement demand, in an echo of the great recession in 2008-2010. That means new equipment sales could fall in some cases 50% and the total fleet will still grow sharply, since sales ten years ago fell by more. There are also pockets of excess equipment now, indicated by falling used equipment pricing, That may mean the fleet has excess slack. Finally, better data from the internet of things may mean fleet utilization can be improved. Still, a large program is positive for CAT (NYSE: CAT), also for cranes OEMs MTW (NYSE: MTW) and Terex (NYSE: TEX)."

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