Wells Fargo sees machinery sector recovery shifting to demand-driven

Investing.com -- Wells Fargo maintains a positive outlook on Construction Rental & Truck Machinery ahead of second-quarter earnings as the sector transitions from a supply-driven to a demand-driven recovery in U.S. non-residential construction and trucking. The firm rates United Rentals (NYSE: URI), Cummins (NYSE: CMI), and Caterpillar (NYSE: CAT) as overweight.

Used earthmoving equipment supply declined 3% in the second quarter, down 13% year-over-year, while aerial equipment inventory increased 1% from the first quarter, up 4% year-over-year. A channel check indicates approximately 100 basis points of year-over-year rental dollar utilization growth in the quarter in the southeast region.

Wells Fargo's Caterpillar channel checks show widening lead times for reciprocating engines. The firm's AI turbine tracker rose 135% in the quarter, and data center starts are running at approximately twice capital expenditure spending levels. These factors suggest potential for Caterpillar's order growth to accelerate beyond the 52% increase recorded in the first quarter. Wells Fargo's earnings per share estimates for Caterpillar stand 6% above consensus.

The spot trucking market tightened in the second quarter, with load-to-van ratios up 9% from the first quarter at levels 2.5 times the historical average. Spot rates increased approximately 45% year-over-year. Wells Fargo views this as evidence that orders represent fundamental demand rather than pre-buying activity.

Lead indicators strengthened across several sectors in the second quarter. Power sector starts rose more than 100% year-over-year on a last-twelve-months basis. Retail starts increased 11%, and office starts gained 12%. Data centers, power, and semiconductors represent 40% of all private non-residential construction but accounted for 70% of private non-residential growth in the last cycle. Wells Fargo projects potential for 8% to 10% private non-residential growth in 2027.

Agricultural machinery data showed mixed results. An early order program check revealed weakness in a challenged geography, while Brazil remains difficult with retail sales down 9% in April and May. Used values improved for tractors, up 5%, and combines, up 7%.

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