Who didn’t like playing with Tonka Toys? The original manufacturer, Mound Metalcraft, started producing the miniaturized machinery in 1947 out of an old schoolhouse along the shores of Lake Minnetonka, just a few miles west of Allegiance Capital’s Minneapolis offices. Today, the company still thrives, and its products still retain much of the rugged components we all remember.
In real life, producers of components and sub-assemblies for full-sized heavy machinery are thriving as well. Worldwide demand for heavy trucks, construction vehicles, mining equipment, road building machinery, agricultural implements and production equipment grew significantly in 2010, with lots of steam left for the future. Component suppliers to these manufacturers are benefitting from a confluence of recent trends. Increased infrastructure spending, high crop prices, record mineral prices, low financing rates, an aging existing equipment stock, higher repair spending, and depleted dealer inventories have hoisted the industry from its pit of doldrums in 2009.
In 2010, the stock market rewarded industry investors handsomely. Our equity valuation index of publicly-traded heavy machinery manufacturers and their suppliers increased more than 60% year over year, far outpacing the overall stock market return of less than 12%.
Privately-owned parts and components suppliers to the industry players should revisit their financial and strategic alternatives in light of these very positive trends. Companies producing close-tolerance machined components, castings/forgings, metal stampings, shapes, plastic parts, subassemblies, structural elements and control systems are all very attractive acquisition candidates for high-value corporations and private equity buyers currently flush with cash. Sellers focused on capturing the current uptrend in this cyclical sector, and avoiding another lengthy trough, are well positioned to maximize value by starting the sale process now. Private company valuations parameters have already increased significantly, and there is a solid story that a good investment banker can sell for maximum cash proceeds.
Sellers capitalizing on this uniquely attractive valuation environment will soon find themselves fully-loaded to acquire and enjoy some new full-size toys in 2011.