Idea Alert: Komatsu

Takeaway: Our view on $KMTUY is similar to our $CAT thesis: Mining Capex is slowing, mostly because of reduced Chinese construction activity.

Keith shorted KMTUY in Real Time Alerts

Levels:

TRADE resistance = 19.91

TREND = 21.63

 

Komatsu Exposed To Declines in Mining Equipment & Chinese Construction Investment

  • KMTUY Like CAT…:  Komatsu is heavily exposed to mining equipment capital spending, which appears to be slowing significantly.  For a detailed review of our views on the mining capital investment cycle, please see CAT’s Deep Cycle.
  • …But More China:  Construction equipment sales have been in free fall in China, with CAT reporting that the market is off 40% yoy.  Komatsu’s percentage of sales in China has dropped from over 20% to around 10%.  The Chinese domestic market has become increasingly competitive and local inventories have been elevated.
  • Valuation:  Komatsu has a strong franchise, but remains overvalued from a cyclically-adjusted standpoint.  We see the ADR fair value in the mid-teens with the potential for an overshoot if mining capital investment continues to weaken.
  • Improved Data:  Recent disconfirming evidence has been a sharp rebound in iron ore and Chinese steel prices.  However, real Chinese rebar prices have only bounced to their 2009 lows.  Coal prices, another key mining equipment end-market, have not rebounded.  Commodity prices in China are an important indicator for mining investment, in our view.

Real Chinese rebar prices have bounced to the 2009 lows….

 

Idea Alert: Komatsu - km1

 

 

…but coal prices have not bounced.

 

Idea Alert: Komatsu - km2

 


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