Heavy Metal

Capital spending is set to surge, and stock prices are likely to follow suit in short order

Looks like the heavy-metal players are ready to perform. Shares of capital-goods manufacturers have been in the doldrums this year. But with capital spending on the upswing -- economists expect 11% growth this year and 7.2% next -- these companies are enjoying mushrooming sales and earnings. Expect their stocks to follow in coming months. "There's more power left in the industrial economy than people generally see," says analyst David M. Raso of Salomon Smith Barney (C ), who expects shares of leaders to rise between 50% and 75% by late 2006 even if earnings growth slows.

Caterpillar Inc. (CAT ) may be the best bet to bulldoze ahead. Although its shares have tumbled 9% this year, the world's biggest maker of earth-moving machinery reported record first-quarter sales and earnings in April. Management says it expects this to be the best year in the company's history. Earnings could jump 69% in 2004 and an additional 22.5% in 2005 on the back of orders for its construction machines, truck engines, and mining equipment, says analyst Elias Lustgarten of brokers J.B. Hanauer & Co. in Parsippany, N.J. If so, the shares could hit $110 in the next year, vs. $76 now.

Traditional late bloomers focused on heavy equipment and commercial construction also look set to flourish. Diversified manufacturer Ingersoll-Rand Co. (IR ) gets 45% of its business from markets that typically recover late in the economic cycle, according to analyst Joanna Shatney of Goldman, Sachs & Co. (GS ). She expects Ingersoll-Rand's earnings to rebound 36% in 2004 and an additional 23% in 2005. That could translate into a 41% rise in its share price over the next 18 months.

Count on two other heavy-duty manufacturers to catch up to the recovery. Cleveland-based Eaton Corp. (ETN ) could enjoy earnings growth of 46.5% this year and 19% in 2005 as customers start buying more truck transmissions for big rigs and industrial gear such as hydraulic equipment. That could hoist shares to $83 within a year, from $61 now, according to Lustgarten. And look for Illinois Tool Works (ITW ) shares to climb over the next 12 months. The reason: a 25.5% advance in earnings this year and 28% more in 2005, predicts analyst Ann Duignan of Bear, Stearns & Co. (BSG ).

Smaller, niche players in the sector also promise outsize returns in the year ahead. Case in point: Oshkosh Truck Corp. (OSK ), with $2 billion in revenues last year. Buoyed by strong sales of its military trucks and emergency vehicles during the downturn, the Oshkosh (Wis.)-based company managed to post double-digit increases in sales and profits. Now orders are starting to come in for its garbage trucks and concrete mixers. So analyst Robert F. McCarthy Jr. of Robert W. Baird & Co. in Chicago figures that Oshkosh will post a 38% increase in profits for the year ending Sept. 30 and 20% next year. His target for the next 12 months: $67 a share, up 26% from $53 now. Call it a capital idea in capital goods.

By Michael Arndt in Chicago

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