* Bulls stress long-term growth, see target price 1,900 yen
* Bears point to weak demand, target 700-800 yen
(For more Reuters BUY OR SELLs, click [BUYSELL/])
By Yuko Inoue
TOKYO, July 10 Talk of a recovery in China and
a rebound in commodities prices prompted investors to bet
heavily on the world's No.2 construction machinery maker
Komatsu Ltd (6301.T), boosting its shares 40 percent at one
stage this year.
Pension funds and long-term funds flocked to the shares --
an early mover in economic cycles -- counting on the company's
big exposure to growth markets and soon-to-start infrastructure
and mining projects in such markets.
Anticipation of its return to robust earnings growth next
financial year have outweighed continued weakness in demand
except in China and Komatsu's potential earnings drop in the
first half. But the shares have lost 16 percent in the past
month after weaker-than-expected economic data.
LONG-TERM SAFE BETS?
Investors say Komatsu, which competes with world No.1
Caterpillar Inc (CAT.N), is a safe bet, citing its strong
competitive edge, strict controls on costs and inventory and a
growth potential in emerging markets.
"It ensures long-term growth. Demand for construction
machinery will increase anyway in such markets," said Koichi
Ogawa, chief portfolio manager at Daiwa SB Investments.
"We plan to buy on dips, but a large decline in the share
price is unlikely," he said, adding that short-term earnings
fluctuations are not a concern.
Komatsu derives 60 percent of its construction machinery
sales from emerging markets, and has a dominant position in the
high-margin Chinese market. Beijing is spending $585 billion
on an economic stimulus package, much of it focused on
infrastructure projects such as roads and railways.
Brokerage Nomura Securities last month upgraded its rating
on Komatsu to buy and boosted its target price to 1,900 yen
from 1,472 yen, citing signs of budding recovery in China,
Indonesia, Brazil India and Russia. Komatsu shares finished
down 1.8 percent at 1,360 yen on Thursday.
Nomura expects Komatsu's per-share earnings to fall 60
percent in the financial year to March 2010 to 30 yen, but to
more than double to 73 yen next year.
"There is ample chance Komatsu will stage a strong earnings
recovery in the second half of this year," said Minoru Matsuno,
president of Value Search Asset Management, though he said he
would wait until the recovery scenario is confirmed later this
month or in October.
PROFIT FALL AGAIN?
But dire current market conditions worry some investors.
"Komatsu's shares are already pricing in earnings growth
too far in advance, even though the private sector hasn't even
started spending money," said Tomomi Yamashita, a senior fund
manager at Shinkin Asset Management.
Komatsu's stock is priced 42 times its estimated earnings,
nearly double the forward-looking PE of 27 for Caterpillar,
according to Reuters Knowledge.
Komatsu President Kunio Noji said last month that global
demand for construction and mining equipment was running behind
its target and its inventory adjustment targets were also
Barclays Capital analyst Tsutomu Kijima said demand for
construction machinery will continue to sag in 2010 and 2011,
with Komatsu facing a third consecutive year of profit falls in
the year to March 2011.
"Demand in China isn't as strong as people say," he said.
Kijima said agricultural machinery maker Kubota Corp
(6326.T) is a much more attractive investment target rather
than cyclical construction machinery shares.
Macquarie Research and Barclays set Komatsu's target price
at 700 yen and 800 yen, respectively.
Among Komatsu's rivals, shares in Hitachi Construction
Machinery Co (6305.T) gained 38 percent this year, but
Caterpillar lost 32 percent.