The capital goods industry comprises a class of companies that make products and equipment that are in turn used in manufacturing other products but are not themselves part of the final output. Examples are industrial machinery, machine tools, process equipment, construction & mining equipment, electrical equipment, textile machinery, printing & packaging materials, etc.
The capital goods industry is highly cyclical in nature and heavily capital intensive. As such, a few companies tend to dominate each of the sub-industries within this space. Barriers to entry are large and many companies operate across the globe. The capital goods industry traces its origins to the industrial revolution and has remained the backbone of the manufacturing world ever since.
Given the cyclical nature, this industry also acts as an indicator of economic strength. Indicators based on manufacturing such as the purchasing managers' index are important indicators used by both the government departments and the private bodies in forecasting future output and setting policies.
Industrial vs Capital goods: Hard to differentiate in the Recent Times
Commonly, capital goods are often included in the broader industrials bucket. Through most pure Industrial companies are manufacturers of goods and products that are directly used by the end-users, in recent years, the distinction between capital goods and industrials have started to blend. For instance, a pure-play diesel engine manufacturer like Navistar not only makes engines but also assembles trucks using its engines. Several other capital goods companies have also been active in mergers and acquisitions and have ended up with a product portfolio to add to their primary business.
Some of the top Capital goods companies in the world include:
Honeywell International is a conglomerate that operates across multiple industry segments. Its businesses include Aerospace, building technologies, factory automation, and performance materials technologies. It is one of the largest capital equipment makers in the world and generated over $32 billion in 2020 revenues.
Caterpillar is one of the largest manufacturers of construction and mining equipment. The firm also makes large engines and diesel turbines. Caterpillar has offices across the world with over $41 billion in 2020 revenues.
ABB, based in Sweden, is a capital goods conglomerate that operates in robotics, heavy electrical equipment, factory automation equipment, and other industrial machinery. ABB generated over $27 billion in 2020 revenues.
Source: Morningstar
Parker Hannifin is an American corporation operating in the motion control and sensors industry. Its products are used in Aerospace, industrial gas, pneumatics, and several other industries. It's one of the largest process control and instrumentation companies in the world. Parker generated around $15 billion in revenues last year.
Stanley Black & Decker makes industrial tools, hand tools, and security products. Its tools and machines are used in a variety of industries including the housing industry. Stanley Black & Decker had around $15 billion in 2020 revenues.
Deere & Company makes heavy equipment and farming machines under the John Deere brand. It is one of the largest players in the US farming industry. Deere & Co. had close to $40 billion in 2020 revenues.
Cummins, based in Indiana, US, is one of the top players in the large engine market in the world. It makes diesel generators, engines for trucks and rail locomotives, and industrial power systems. Cummins generated around $20 billion in 2020 revenues.
Source: Morningstar
Emerging Trends:
Artificial intelligence and other innovations are making their way into the manufacturing industry. With the future looking increasingly aligned with innovation and technology, many capital goods makers have become early adopters of the latest in innovation. Factory automation, robotics, and process automation are increasingly prevalent in industries across the world. Companies operating in this area such as ABB, Siemens, Schneider, Rockwell Automation, Honeywell, and Teradyne stand to gain from this trend. Other emerging trends in this space include clean energy and environment-friendly alternate fuel technologies, sustainability in manufacturing, and niche areas like 3d printing.
Investment options:
Direct investment into the common stocks of the capital goods players is one way to invest in this area. However, with a variety of industries and sub-industries, ETFs offer a simpler way of gaining exposure to capital goods companies. Some of the options are Industrial Select Sector SPDR Fund (XLI), Vanguard Industrials ETF (VIS), First Trust Industrials/Producer Durables AlphaDEX Fund (FXR), and iShares Global Industrials ETF (EXI).
Source: Morningstar
Previous Article
In the current scenario, one question on the minds of both investors and speculators is that are there more opportunities in the commodity space, or is it too late already?
The Russian invasion of Ukraine is the most aggressive military action to happen in the European region since World War 2. From the perspective of the capital markets too, this has been a dramatic event.
Public utilities are an absolute necessity and have predictable cash flows. In this article, we discuss the investment landscape and the key players within the utility sector.