DEALTALK-Equipment makers cheap but few deals seen soon

By James B. Kelleher

CHICAGO, Nov 21 (Reuters) - Outside of banking, few sectors have been hammered harder by the collapse of the U.S. housing market and the associated meltdown on Wall Street than the heavy machinery industry.

Stocks across the sector -- which makes everything from earth-moving, farming and mining equipment to construction cranes and on-highway trucks -- have tumbled 70, 80 and in some cases as much as 90 percent so far this year, making the Standard & Poor's 500, which has fallen nearly 50 percent, during the same period, seem a good investment by comparison.

Those outsized losses prompted Ann Duignan, an analyst at J.P. Morgan, to wonder aloud this week whether the industry wasn't ripe for a round of deals based on bargain hunting.

While acknowledging the many obstacles to acquisitions, including tight credit, consolidation in the machinery sector is "inevitable at some point, if the current macro environment persists," Duignan said. "Potential acquisition targets look cheap."

How cheap? Consider Joy Global Inc (JOYG.O) a Milwaukee-based maker of mining equipment whose board has authorized a $2 billion stock buyback. If executives at the company, which has seen its stock fall 70 percent so far this year, made the entire buyback at today's prices, "they could buy back two-thirds of their stock," said Alex Blanton, an analyst at Ingalls & Snyder.

CONSOLIDATION NATION

Duignan said she believes a number of companies -- including Joy Global, Bucyrus International Inc (BUCY.O), Terex Corp (TEX.N), Manitowoc Co Inc (MTW.N), Oshkosh Corp (OSK.N), Agco Corp AG.N Lincoln Electric Holdings Inc (LECO.O) and Crane Co (CR.N) -- are potentially attractive takeover targets based, in part, on how far they've fallen from their 52-week highs.

She also identified a handful of potential acquirers, including Deere & Co (DE.N), Paccar Inc (PCAR.O), Parker Hannifin Corp (PH.N) and Illinois Tool Works Inc (ITW.N) -- and went through a list of possible deals.

But the potential acquirer Duignan seemed most fascinated with was Caterpillar Inc (CAT.N), the world's largest maker of construction and mining equipment, a company she imagined could be interested in four of the targets: Joy Global, Bucyrus, Agco and Oshkosh.

Duignan predicted that "the process of consolidation is likely at some point after the current liquidity crisis eases and could start with small-cap companies ... If the market reaction is favorable to the initial transactions, then this could set the stage for others to follow."

STEEP DISCOUNTS

Duignan's musings were a fun thought experiment and a pleasant diversion from the ugliness in the capital markets -- and immediately generated debate among her colleagues.

Most of them downplayed the likelihood of a coming consolidation wave in the industry, particularly one with Caterpillar in the lead.

Peoria, Illinois-based Caterpillar, they point out, has a history of either growing organically or through smaller acquisitions.

While the sell-off in machinery stocks has whittled down the market capitalization of potential targets, "they're still big companies," said John Kearney, an analyst at Morningstar, "so they would be massive acquisitions in pretty uncertain times.

"I just don't think there's a big appetite right now -- on the part of management or shareholders -- for big risky acquisitions."

In addition, Kearney points out that investors who still own the shares are likely to resist any bargain-hunting.

"A lot of the people who are still in these stocks think they're significantly undervalued," he said. "So it's going to take a pretty significant premium. It would be hard for Terex, which was trading at $90, to take $20 a share," even though that's double what the company's stock currently fetches.

GUESSING GAME

Caterpillar could, of course, go hostile. But Blanton at Ingalls & Snyder, who has covered the industry for four decades, doubts that would ever happen.

"That's not their style," he said.

Another potential problem? While Jim Owens, Caterpillar's chief, told Reuters this week that some consolidation was coming, he said: "I am not so focused on acquisitions."

Blanton took issue with the list of possible buyers and sellers for a different reason.

"What I've found over the years is that you can waste a lot of time speculating about these things," he said, "and 98 percent of the time it's wrong, and the one combination that does occur is often the one you didn't think of because it's so unlikely."

As examples, he cited Flextronics International Ltd's (FLEX.O) 2007 purchase of Solectron Corp and Oshkosh's 2006 purchase of JLG Industries Inc. "No one predicted either of those combinations," he said. "No one." (Reporting by James Kelleher, with additional reporting by Rachelle Younglai in Washington)