Concerns about the impact of slower U.S. and global growth on machinery demand has brought down most machinery company stocks as purchases of production equipment are easily postponed when economic conditions weaken. However, not all companies are equally affected by slower economic growth as it depends on the specific products they produce and sell, as well as the regions in which the products are sold.

For instance, demand is expected to remain strong in emerging markets, where governments are under pressure to build housing and infrastructure to support the fast growth and industrialization of those countries. In addition, companies in these regions will also be buying new machinery and equipment.

Demand for mining and other resources equipment is also likely to be strong as the expected moderation in prices is not only temporary, but still leaves prices and profits at high levels.

In addition, even in the U.S., for which growth is forecast to slow the most, construction of non-residential structures is expected to remain pretty stable. The big downturn will be in residential construction.

Global money managers say there are investment opportunities in a number of smaller machinery companies whose stocks have gone down further than they should have, given their mix of business and geographical sales. This includes Stockholm-based Atlas Copco AB, Cleveland-based Eaton Corp., Manitowoc, Wis.-based Manitowoc Co. Ltd. and Westport, Conn.-based Terex Corp.

Here’s a look at the four companies in greater detail:

> Atlas Copco AB manufactures compressors, construction and mining equipment and industrial tools. Compressors account for about half of the company’s sales, with construction and mining equipment at 40% and industrial tools at 10%. Its estimated revenue for fiscal and calendar 2007 is about US$9.3 billion. (All figures are in U.S. dollars unless otherwise noted.)

Reports from both .P. Morgan Securities Inc. in New York and UBS Ltd. ’s London office have “buy” ratings on Atlas, with 12-month respective price targets for the A shares of 119 Swedish kronas and 125 kronas. The shares were trading at 88 krona ($14) on the Swedish Stock Exchange on Jan. 4.

Joe D’Angelo, portfolio manager at Signature Advisors, a unit of CI Investments Inc. in Toronto, believes Atlas’s growth will be much stronger than what is factored in the current stock price. He points out that it operates at the high end of the market, focusing on increasing efficiency for customers. “You get marginalized if you don’t provide productivity-enhancing tools.”

D’Angelo particularly likes Atlas’s strategy, which involves outsourcing, but keeps ownership of most of the intellectual property. He also notes that about a third of its revenue for compressors is from fast-growing emerging markets. The company also has sizeable after-sales revenue, which isn’t subject to the ups and downs of sales.

J.P. Morgan’s Dec. 6 report agrees, stating that Atlas is more defensive than other machinery companies because of its outsourcing model and emerging-markets exposure. The report calls Atlas “one of the highest-quality” listed industrials.

However, J.P. Morgan’s report cautions that it’s possible Atlas’s suppliers may not be able to meet the challenge of double-digit growth in 2008. Nevertheless, it says, J.P. Morgan has confidence in Atlas’s management, noting its “outsourcing philosophy is the strongest and most successful in our coverage.”

The other risk is currency movements — which, with the downward trend on the U.S. dollar, are likely to have a negative impact on earnings — D’Angelo says. But, he says, Atlas’s growth prospects provide more than an offset.

A Dec. 11 UBS report points out that the current valuation doesn’t take into account the fact that Atlas has sold off its capital-intensive and volatile U.S. equipment rental operations and that it is a more geographically diverse company than it was during the last downturn. In addition, the UBS report notes that the company is also benefiting from the strength of the mining sector.

The report adds that Atlas has “an almost unrivalled track record of growth, margin stability and execution across the cycle.” It notes that return on capital, at 35%, is almost twice as high as the sector average and its growth is faster and more stable than that of its peers.

Net income was 6.1 billion Swedish krona ($887 million) in the nine months ended Sept. 30, down from 6.2 billion krona a year earlier. (Note that the 2006 results included earnings from the rental business, which has subsequently been sold.) Income from continuing operations was up 34%. Revenue, excluding discontinued operations, was 45.8 billion krona vs 36.9 billion krona. Long-term debt was 3.7 billion krona at Sept. 30.

@page_break@> Eaton Corp. , whose 2007 revenue is estimated to be $13 billion, produces fluid power equipment and electrical equipment as well as components for automobiles and trucks. It is another of D’Angelo’s picks. He says the market is assuming that sales will be down this year, which he doesn’t expect will happen. In his view, the market is treating the stock as a deep cyclical, missing the fact that it’s very diversified.

D’Angelo points out that Eaton has exposure to the U.S. non-residential construction market, which is expected to continue growing in 2008, as well as to the oil and gas, mining and power generation sectors. He also notes that about 50% of sales are outside the U.S.

Eaton is a very well-managed company, D’Angelo’s says, and he expects the stock to see higher price/earnings ratios over the next three years.

Reports issued in October 2007 from J.P. Morgan and New York-based Argus Research Co. had “buy” ratings on Eaton. The Argus report’s “buy” rating is just for this year; however, the firm expects Eaton to perform in line with the S&P 500 over the next five years.

J.P. Morgan believes that, at current prices, Eaton is trading at “a noteworthy discount despite its better end market and geographical mix.” Furthermore, Argus believes Eaton is in the “right” segments of the construction industry and is also helped by strength in overseas markets. It also expects truck demand to increase in 2008 while aerospace markets will continue to be strong.

The Argus report had a 12-month price target of $103. The widely held 145.8 million shares closed at $92 a share on Jan. 4.

The Argus report agrees with D’Angelo that Eaton is benefiting from improved business and geographical diversification as well as restructuring. It notes that:

> international sales have increased to 36% in 2006 from 25% in 2002;

> almost half of the company’s North American business is tied to commercial construction and aerospace, which reduces earnings volatility; and

> after-sales service revenue has increased by 75% since 2000, and now accounts for 25% of total revenue.

Nevertheless, the Argus report warns that the “no-growth auto industry and the cyclical truck industry pose challenges” for Eaton.

Another risk relates to pension and other post-retirement benefits. Total plan expenses in 2006 increased to 24% of operating earnings, plus plan expenses, from 20% in 2005. The Argus report says this ratio is one of the worst in the diversified industrials sector. The pension plan is only 69% funded and the health plans are completely unfunded.

Net income was $738 million in the nine months ended Sept. 30 vs $709 million a year earlier. Revenue was $9.7 billion, up from $9.2 billion. Long-term debt was $2.5 billion at Sept. 30.

> Manitowoc Co. Ltd. is mainly involved in the manufacturing of cranes, but it also produces mid-sized ships and food-service equipment. Cranes account for the bulk of the company’s business, at around 80% of its estimated 2007 revenue of $3.9 billion. Food-service equipment accounts for 11% and mid-sized ships for 9%. The company does 59% of its business in the U.S., 34% in Europe, the Middle East and Africa and 7% in Asia-Pacific.

Carlee Price, a research analyst at Franklin Resources Inc. in San Mateo, Calif., likes Manitowoc, calling it very focused on a few good niches, such as cranes for the construction industry, barges for waterways and ice machines for the food services industry. She likes the company’s international exposure, which she believes will make the stock’s performance stand out in the face of the U.S. slowdown.

Reports from J.P. Morgan and UBS’s New York office have “neutral” ratings on Manitowoc, although UBS raised its 12-month price target in a Dec. 12 report to $54 a share from $50 based on the company’s increased earnings expectations. The target is based on a 5%-10% premium for the stock plus $2 a share in excess cash. The 125.6 million widely-held shares closed at almost $45 a share on Jan. 4.

The Dec. 12 report marked the second time in the past few months that UBS has raised its target price. The first was on Nov. 2, when it increased the target price to $50 from $45.50. That was primarily based on an increase in UBS’s estimate of sales growth for cranes in 2009 to 20% from 15%.

UBS notes that Manitowoc is expanding crane capacity in Wisconsin and developing a facility in Slovakia, which should start production this year. The firm also bought Shirke Construction Equipment of India in the third quarter of 2007.

The J.P. Morgan report says the additional crane capacity should help sales growth, but it could also lead to lower margins. Other downside risks include a faster-than-expected levelling off of crane orders, increased raw material costs and an acquisition that investors don’t like.

On the other hand, J.P. Morgan’s report notes that there’s the upside risk that backlogs for crane orders could increase, implying an extended cycle.

Net income was $237.4 million in the nine months ended Sept. 30, almost double the net income of $122.6 million a year earlier. Revenue was $2.9 billion vs $2.2 billion. Long-term debt was $263.4 million at Sept. 30.

> Terex Corp. produces capital equipment for the construction, infrastructure, quarrying, mining, shipping, transportation, refining and utility industries.

Aerial work platforms are Terex’s biggest business, accounting for 27% of the $6.6 billion in sales in the nine months ended Sept. 30. Cranes accounted for 24%, materials processing and mining equipment for 22%, construction equipment for 21% and road building, utility products and other equipment for 8%. (The company’s revenue for 2007 is estimated to be about $9 billion.)

Price is impressed with Terex’s management team, which took a quite small company and turned it into a large global player. In the 1990s, when several crane companies were on the edge of bankruptcy, Terex identified companies whose assets were under-priced and bought them. It’s reaping the rewards today, she says.

A Dec. 10 UBS report raised the rating on Terex to a “buy” from “neutral,” although it didn’t increase its 12-month target price, which remained at $84 a share.

The upgraded rating was based on UBS’s rental equipment industry survey, which indicates that the short-term decline in rentals of aerials may not be as weak as anticipated. Indeed, the UBS survey says that 79% of rental equipment branch managers surveyed expected to add to, rather than reduce, their aerial work platform fleet in 2008. UBS believes much of the recent drop in Terex’s stock price is a result of fears regarding the impact of declining rental demand on its 2008 results.

In addition, the UBS report says the current stock price provides a buying opportunity. On Dec. 10, Terex’s 102.6 million widely-held shares were trading at $67 each, which was 10.3 times UBS’ 2008 earnings per share estimate. That puts it at around a 33% discount to the S&P 500, which is in line with the average machinery company discount at this point in the business cycle. UBS points out that this does not recognize Terex’s “favourable late cycle exposure to crane and mining end markets.”

Since UBS’s Dec. 10 report, Terex’s stock price has fallen even further — closing at $58.44 on Jan. 4, making the buying opportunity even greater.

A Dec. 18 report from Credit Suisse Securities (USA) LLC in New York also suggests the drop in the stock has been overdone, given that about 65% of its sales are outside the U.S. and about 45% of earnings are from cranes and mining. Credit Suisse had a “buy” rating on Terex in the report, although it lowered its 12-month target price to $80 a share from $98.

Net income was $439.9 million in the nine months ended Sept. 30, up from $299 million a year earlier. Revenue was $6.6 billion vs $5.6 billion. Long-term debt was $678 million as of Sept. 30. IE