Afterthought – Picking the Bargains

Last March the Dow Jones average hit 6,500, 55 percent off its high a year earlier. Many people saw Depression and felt desperate. The really smart few bought Ford at $1.80. Today it sells for around $12.

The question I have been grappling with for the last few months is whether the used Wickman or National Acme screw machine is today’s Ford stock? You can make your own analogy for your business. Has the horrifying recession so killed expectation that it has left a huge opportunity for the gutsy and shrewd risk taker.

The first question to ask is, “Can it get worse?” Absolutely. We could have stagflation with higher interest rates,moribund housing, commercial real estate in ruins, and a weak dollar pushing up the price of imports, especially raw materials.

Automotive could fester at 10 million units or less, and oil could rise to $100 as the dollar weakens under Obama, Bernanke, Pelosi policies.

Europe could uglify further as Greece slides down the sink and Portugal and Spain reach 20 percent unemployment.

Credit stinginess could asphyxiate small business. Nancy Pelosi could find charm and the Democrats could solidify their monopoly in Washington in the November elections.

Excuse me. I must now vomit.

But what if all this awful stuff does not happen, or at least is somewhat less terrible than the negativists postulate?

Maybe automotive gets some traction. A rejuvenated GM finds a buyer for some of Howie Long’s new models. Maybe Ford’s Fusion and F-150s keeping gaining share.

What if the world doesn’t come to an end when the health care bill is signed? Maybe the commodity speculators get burned if oil demand stays low and they run out of storage space for the excess supply.

What if the Mullahs fall in Iran and a new regime decides to make a deal to shelve nuclear bomb development. That would probably shave $10 to $20 a barrel off the oil price.

We can “what if” everything to death, but at some point people in the machining business need to place bets. Doing nothing, punting, is a bet, too. It is a gamble on things staying the same over the next few years, which history tells us is quite unlikely.

I think the big question of 2010 for us is whether we see a tipping point upward for machine tool prices, especially used equipment.

The statistics show nice improvement in machine tool sales in November and December. The three-month moving average of sales is rising. The PMPA users index shows a big rebound in hours worked since the May of 2009 low point. Auction prices of CNC machines are firming. The inventory blow off of the big Japanese builders with some indulging in 10 percent to 30 percent discounts off list, is tapering off. Repos of recent vintage CNC lathes and mills appear to be fewer than six months ago.

In our Graff-Pinkert used machinery business, late model CNC machines are selling rapidly and the supply of machines less than five years old is dwindling.

We are speculators in used equipment. We can buy a five-year-old Mori or Haas and hope to squeeze out a 10-15 percent profit if the ball screws are good. But the enticing possibility of buying for “dirt” and selling for real money lies with the dirty orphans of manufacturing—the old reliable Acmes, Wickmans and New Britains.

Maybe they are all headed for the scrap heap and we lose a long shot bet. But they may come back—not to sexy numbers—but perhaps to current Ford stock numbers. When we buy a 1 5/8” RB8 Acme for five grand it is not a stretch to imagine a user buying it for 25 grand if it runs well. There is still plenty of excess multi capacity, but a lot of the idle machines are ratty piles of iron. A tidy, tight machine could be a handy addition for a firm that can run a multi profitably. And surprisingly, there are not many nice ones out there.

I think this is the time to place a sizable bet on the old nag. It might well be Ford at $1.80.

Share this post