Machinery manufacturers have so far been largely unaffected by the continuing credit crisis thanks to healthy cash flows, but a larger economic slowdown could spell trouble, analysts said Thursday.
"In the industrial sector, there hasn't been excessive borrowing" due to leaner management and manufacturing practices in recent years by firms such as Deere & Co. and Caterpillar Inc., said Ingalls & Snyder analyst Alexander M. Blanton.
Some manufacturers have dramatically reduced capital spending by creating additional capacity by getting rid of inventory and shrinking the floor space needed for production, he said.
But "things could get more difficult" if a worldwide economic slowdown - led by the decline of the U.S. housing market - takes hold and commodity prices continue to drop, Blanton said.
Peoria, Ill.-based Caterpillar, which operates a financing business, has $6 billion to $7 billion in unused credit lines with banks, "which is more than enough to fund any short-term needs of the credit corporation," Blanton said.
Less than 10 percent of the financing for the credit business is commercial paper, he said, and Caterpillar last month sold notes in an offering that was oversubscribed.
The worst that could happen, Caterpillar believes, is that it won't be able to expand lending to customers, according to Blanton.
Another analyst, Charlie Rentschler of securities firm Wall Street Access, said Deere and Caterpillar "both have good strong balance sheets, and I don't see them having difficulty weathering this crisis."
Moline, Ill.-based Deere, the world's largest maker of farm machinery, also runs a credit business. Both Deere and Caterpillar have "always managed those businesses very nicely," Rentschler said.
"I'm not concerned," he said. But "no matter who you are, you're going to be a lot more careful about who you lend money to."
Shares of Deere gained $2.10, or 3.5 percent, to close at $62.02. Caterpillar shares rose $2.17, or 3.4 percent, to $65.32.