Reconstruction demand?
I might have been guilty of underestimating domestic demand for forklifts. Year-to-date, forklift sales in Japan have risen 25.8% year-on-year, to 34.3k units. I suspect some of this is driven by the resurgence in auto output, which has caused a general uplift in manufacturing, and some is driven by the ongoing reconstruction in Northern Japan after last year’s earthquake. By contrast, export sales remain weak, having fallen 7.4% to 21.8k units in the January to June 2012 period. Combined export and domestic sales are up 10.4% year-on-year.
While this looks like pretty solid performance I would make two cautionary points.
The year-on-year comparisons will become more difficult in the second half of 2012. Indeed domestic sales grew just 0.6% YoY in June, so the numbers are going to be on a deteriorating rather than an improving trend going forward. In the chart below, the red line (2012) ran well ahead of the blue line (2011) up until May, but in June they have converged.
With exports so weak, forklifts are a one-trick pony. If domestic demand falters (say, for example, that supply chain issues such as steel shortages slow down reconstruction in Northern Japan) then total sales will probably implode. Absent a genuine, sustained recovery in exports you could see very volatile sales for the next 12 months.
My suggestion would be to focus on pure-play auto parts stocks, particularly those in the Toyota group, such as Denso, Aisin Seiki or Toyota Boshoku. Results for these stocks should be out at the end of this week and should be pretty good.
Let’s assume you decide to ignore my advice and get some exposure to the forklift industry. You might have taken a good look at booming heavy truck sales in North America and concluded from this that at some point we must see rising demand for forklifts. After all, pretty much everything that gets on a road truck is put there by a forklift truck. Or you might have a strong view on bottoming capex in Europe and the US. In that case, which stocks should you look at?
The problem is that globally you have a very limited pool from which to choose. Often the forklift operations are just part of a larger whole, which dilutes your exposure. Probably the purest play is Jungheinrich, while NACCO Industries is a conglomerate, although it plans to spin out the materials handling operations. Japanese companies dominate the global market – see this post for an overview of market share – with Toyota Industries and the much samller Nichiyu being the two main stocks. In theory you could buy Komatsu or Hitachi Construction Machinery, both of which have forklift operations, but those are marginal compared to the main product lines. Both those latter two stocks move on China construction demand, not forklift sales.
In the chart above, the real outlier is NACCO. If you adjust for the weakening of the Euro, Jungheinrich is up only 3% or so year-to-date and not 11% as shown in the chart. NACCO may have moved on the news, mentioned above, that it plans to spin off its forklift operations (the Hyster and Yale brands) into a separate entity some time in the third quarter of CY2012. Given that the materials handling operations account for nearly 80% of NACCO’s revenue, you do rather wonder whether what is left (kitchen appliances and retail stores?) will be worth much, but it probably better for Hyster-Yale that they break away. Of the four stocks there, I like Toyota Industries, a well-managed company that is the leading supplier of automotive air compressors in the world and one that is benefiting from the rise in Toyota’s production.
Those figures in brief
Total forklift sales for June 2012, as reported by the Japan Industrial Vehicle Association (JIVA) on 24 July, came to 9.85k units, falling 12.7% year-on-year and rising 17.2% month-on-month. Domestic sales rose 15.7% month-on-month to 6.1k units, bang in line with the longer term median increase for June relative to May of +15.9%, so domestic shipments were not exceptional in seasonal terms. Exports fell 28.1% YoY to 3.7k units, rising 19.7% month-on-month. That was a way below the median for June of +25.4%, so a bit disappointing.
Looking briefly at the three categories of forklift (battery-powered, gasoline and diesel) there is a large gap in sales performance between battery and the internal combustion engine trucks. Battery forklifts tend to be used for light- to medium-duty jobs in ‘cleaner’ industries such as food, medical or clothing, whereas diesel and gasoline are used mainly in traditional manufacturing. Year-to-date, battery forklift sales in Japan have risen 20.8% to 18.9k units, whereas diesel is up 32.3% YoY to 10.1k units and gasoline has increased by 32.7% YoY to 5.2k units. So that would seem to fit with our hypothesis mentioned above, which is that a recovery in vehicle production and reconstruction work in Northern Japan is helping to drive demand.
On the subject of weak exports, this chart shows 2012 export sales (the red line) crossing below the blue line (2011 export sales) and heading towards the purple line showing 2010 exports. Year-to-date export sales in 2012 are down 7.4% and that is the worst figure so far in 2012, which is to say that the trend is worsening, not improving.