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.