With the recession long in the rear view mirror, many governments, particularly in the developing world, are eager to revisit previously idled infrastructure projects or initiate new ones. While spending in this area is key to creating jobs, it also enables a country to meet basic needs and enhance productivity and competitiveness. 

Urbanization in emerging markets is occurring at a break-neck pace, necessitating the need to upgrade or build communications systems, transportation systems, and energy capabilities. What’s more, development is also driving investment in the public services realm, including clean water, sanitation, health services, etc. 

In certain developed countries, federal and local governments are handcuffed by budget shortfalls and fiscal constraints. Nevertheless, we don’t expect empty coffers to prove detrimental. In particular, the successful implementation of public-private partnerships or full privatization is a recipe to follow. Another viable source of capital is the bond market. Municipal and revenue bonds (supported by revenues from a specific project, such as a highway toll) are two alternatives. Moreover, public and private spending globally appears to position the heavy equipment industry in an enviable position, on pace to placate the needs of income and growth investors.

Also contributing to auspicious operating conditions is strength in many commodity markets. While crop and metals prices are off their highs reached in the early stages of 2011, they remain appealing from an investment perspective, driving demand for large mining equipment. Firm energy (mostly oil) fundamentals have encouraged spending, with purchases of engines and turbines rising as a result. Lastly, global construction activity appears to be on the mend. After posting modest year-over-year gains over the first 10 months of 2011, the number of U.S. housing starts has taken a turn for the better since the fourth quarter of 2011.

Leading the way is Caterpillar (CAT Free Caterpillar Stock Report), the world’s largest machinery manufacturer of agriculture, road building, construction, mining, equipment, as well as gas turbines and diesel-electric locomotives. In order to benefit from favorable industrial conditions, Caterpillar is expanding production capabilities for tractor facilities and locomotive manufacturing in the United States. Concurrently, it is boosting capacity to make excavators and mining trucks in the developing world.

Caterpillar is on course for another good year, after performing superbly in 2011. Management is looking for share net to approximate $9.25 in 2012 on sales of $68 billion-$72 billion. Our top- and bottom-line estimates are set at $70 billion and $9.20 a share, respectively.

Cummins (CMI) is a global manufacturer of diesel and natural gas engines for heavy, and medium-duty trucks, bus, energy agricultural, construction, mining, oil & gas markets, etc. With a network of 600 company-owned and independent distributor locations and 6,500 dealer sites in 190 countries, the company is positioned to benefit from rising spending to meet new emission standards, a strong highway market in North America, elevated spending in the oil and mining industries, and surging demand in India’s power generation realm.

While these two global companies have planted their respective flags in all corners of the world, Sany Heavy Industry too has ambitions. The Chinese company, which makes construction and hoisting machines, intends to sharply boost its capacity during the next five years, with the construction of 10 plants. It is focusing primarily on other emerging markets.

Eager to keep pace with United States-based rivals, and not lose ground to Sany, Komatsu Ltd., a Japanese manufacturer of construction, mining, and forest product equipment, is making acquisitions a staple of its business strategy. In the same vein, the industry’s second biggest entity is looking to establish partnerships with technology producers that could help upgrade electronic components.

All told, the need to replace older equipment in most developed countries, and demand for new machines in emerging markets, augurs well for the heavy equipment makers discussed here.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.