Japan forklift sales: don’t mention the E word

by SR on September 24, 2012

Toyota Industries share price performance compared to other forklift and auto stocks

Forklift stocks are not the place to be

Conclusion: I wanted to avoid using the “E” word, but August 2012 forklift sales data (announced on 24 September) make the performance gap between Export and domestic sales in Japan too obvious to ignore – not that we’ve been ignoring it. I suggest you avoid “mixed” machinery and auto parts plays such as Toyota Industries, which is the world’s largest supplier of forklift trucks, and its competitors Jungheinrich and NACCO.

Despite the strong share price performance of Toyota and Denso year-to-date (+24.8% and +25.2% respectively) these two stocks still seem to me to be a low-risk area of the auto/machinery space. My reasoning is that investors are so nervous that despite the underperformance of machinery stocks relative to auto stocks, investors will stick with known “winners” (e.g. Toyota) rather than try to play the sector rotation game aggressively. If you do want exposure to machinery, I would suggest a stock like Komatsu, which is fundamentally sound and is one of the worst performers in the Japan machinery sector year-to-date. If there is even a hint of a recovery in China Komatsu’s share price will come roaring back. (NB: Komatsu is also a supplier of forklifts, but this is an insignificant part of Komatsu’s total business.)

Performance of global market indices year-to-date (% change)

Looking at the chart at the top of the page I’m surprised that Jungheinrich and NACCO are still performing so well relative to their Japanese peers. Part of this is simply the underperformance of Japan relative to the German and US stock markets; as the chart directly above shows, the Dax 30 has risen 26.3% year-to-date and the S&P500 is up 16.1% compared to a rise of just 3.8% for Topix. Another reason is likely the strengthening of the yen against the US dollar and the Euro, which makes the Japanese suppliers less competitive. Nevertheless, the gap between the Japanese and the others still seems too wide to me and investors should consider lightening positions in Jungheinrich or even taking a short position if that is feasible. Any weakness in earnings is punished severely in today’s markets, but Jungheinrich’s earnings are not scheduled until 8 November 2012 so the stock may stay high for some time yet.

August in more detail

We’ve talked before many times (for example here, here and here) about the favourable position in 2012 of Japan auto companies (especially Toyota) when compared to most Japan machinery companies. Looking at Japan machinery orders it is clear that orders from overseas machinery are generally weaker than orders within Japan, as the domestic market is being supported by reconstruction in areas of Northern Japan hit by the earthquake and tsunami in March 2011. In addition, there is some positive impact on machinery in Japan from the surge in auto production that we have seen year-to-date in 2012.

It should come as no surprise then that Japan forklift truck sales are showing a similar trend to Japan machinery orders. August 2012 combined sales and exports fell 12.3% year-on-year to 8.3 thousand units. Year-to-date, domestic sales and exports have risen 4.7% YoY to 74.27k units, but the split for domestic and exports is +18.5% and -11.5% respectively. Exports are in a parlous state. In support of my thesis that the auto industry and post-quake reconstruction is driving forklift sales within Japan, I note that battery forklift sales for January to August 2012 are up 15% compared to the same period in 2011, while gasoline and diesel forklift sales are up significantly more, +24.8% and +22.3% respectively over the same period. The significance is that battery-powered forklifts tend to be less powerful and are more often used in ‘clean’ environments such as the food and beverage, medical and clothing industries. Internal combustion engine forklifts are typically used in heavy industrial settings – like the auto industry, or in construction work of the kind being conducted in Northern Japan.

Japan forklift cumulative sales and exports, year-to-date (thousand units)

To put August 2012 in its seasonal context, sales typically fall because August is a holiday month. The median change in export sales for the month of August from 2000 onwards is -11.6% month-on-month, whereas August 2012 exports posted a fall of 19.8% month-on-month. That’s easily one of the worst performances of the past 20 years (see chart below). Domestic sales fell a little bit less than the median.

Month-on-month change in export sales of Japan forklifts for the month of August 1992-2012

Going forward we should expect continued weakness in export sales. As for domestic demand, if the main sources are – as I argue above – autos and reconstruction, then I think the upside to auto demand is limited. While vehicle production should stay at fairly high levels, it’s unlikely to keep breaking out to new records. As for post-quake reconstruction demand, this could last for years but the issue here is not so much the absolute level of demand, but gating factors that are already slowing the pace of the rebuild, perhaps most noticeably a severe shortage of concrete. All in all, forklift related stocks like Toyota Industries and Nichiyu look unattractive in terms of the likely news flow. Go for pure auto parts plays instead, preferably Toyota group related.

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