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BUY OR SELL-Komatsu: are investors looking too far ahead?

* 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/])

TOKYO, July 10 (Reuters) - 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.


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.


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 behind schedule.

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.