Caterpillar, Johnson Controls and NCI Building Systems: Set for a Better Second Half?

Anyone wondering about the state of play in the economy should keep a close eye on the commercial construction sector in the U.S. While, the recovery in the U.S. residential market is likely to moderate from its torrid pace last year, the commercial construction sector has yet to really take off at all. In this regard, Caterpillar , Johnson Controls and NCI Building Systems  are all interesting to look at for clues as to if and when the sector will meaningfully contribute to economic growth again.

Caterpillar and Johnson Controls
At first, they may appear to be a disparate collection of business to look at, but all three have a specific exposures to the industry. Moreover, as outlined in a previous article they all looked like they were giving somewhat conservative guidance in their results in the first calendar quarter. Now that the second calendar quarter results are in, what are they saying about the state of the industry?

Caterpillar's results and guidance were the most positive overall, as the company upgraded its full-year forecast for construction machinery sales from 5% to 10%. Essentially, Caterpillar's construction machinery sales are receiving a boost from an inventory rebuild by its customers after they ran down inventory in 2013. On a positive note, management also outlined on the conference call, that there had been an increase in end-user demand -- a good sign for the industry.

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NCI Building Systems Equity Research

A lot of hopes are being pinned on the non-residential construction market in 2014, and major companies such as Johnson Controls, and Caterpillar Inc. are hoping for broad-based strength in the sector. In this regard, it's fascinating to look at a company like NCI Building Systems   and see what its outlook means for the sector.

Why NCI Building Systems matters
It's interesting to contrast Johnson Controls and Caterpillar, because the former gave a cautious outlook for its heating, ventilation and air conditioning, or HVAC, markets in 2014, while the latter predicted its construction machinery sales would rise 5%. Johnson Controls may be conservative with its guidance, because current conditions are affected by the weather, and because HVAC solutions are relatively late stage in a construction project.In other words demand tends to kick in later in the cycle. However, Caterpillar's construction machinery is likely to have a longer-cycle demand and be utilized more in early stage work (excavation, earth moving, and the like). Perhaps this explains the difference in outlook?

 

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