Can Terex Achieve $5 of Earnings in 2015?

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In the Q4 earnings release, Terex (NYSE: TEX) announced the goals of earning $5 in 2015. Considering the company just reported a year of achieving $1.83, the natural question is whether the company can legitimately grow earnings that fast over the next 3 years.

The company is a diversified global manufacturer of equipment focused on aerial work platforms, construction, cranes, material handling and port solutions, and materials processing.

With the stock dropping to $31 after hitting $35 around earnings last week, investors no doubt question the ability of the company to quickly grow margins in order to support that level of earnings. First, the review will focus on what the company forecast. Second, the review will focus on the margin levels of comparable machinery companies.

$5 in 2015

When looking at the 2012 results of $1.83 and the forecast of roughly $2.55 for 2013, an investor would clearly doubt how Terex could double earnings over the following 2 years -- especially considering the company is only forecasting around 10% revenue growth during that time period. The majority of earnings gains must come from increasing the operating margins.

The company provided 2015 goals of revenue reaching $10B, earnings hitting $5 per share, operating margins hitting 10%, and a return on invested capital reaching 15%.

The primary focus of investors has to be on the operating margins goal. Terex only produced operating margins of a paltry 3% in 2011. It was able to more than double margins to 6.4% last year on only 13% revenue growth. More of the same is forecast for 2013 with margins increasing to above 7% on revenue growth in the 10% range.

Terex has already achieved the 10% margin goal in 3 of the 5 divisions leaving the Construction and MHPS needing to catch up. Both divisions are expected to struggle around the 3% mark in 2013 with Construction below the mark and MHPS slightly above. When broken down to this detail, the goal appears much more achievable.

Heavy Machinery Margins

A great way to understand where the operating margins for Terex could head is to review the existing margins from market leading machinery companies. Terex has made a shift over the last couple of years to be less like a mini Caterpillar (NYSE: CAT) and more like a global leader in the categories it focuses on.

To that extent, the company sold the mining equipment business to Joy Global (NYSE: JOY) back in 2010 and purchased Demag, which focused on port cranes. This business fit in nicely with the materials handling segment along with an existing focus on cranes. The moves provide the company with a greater focus on the lifting and materials handling sectors and away from mining.

When reviewing the margins for construction equipment leader Caterpillar, mining equipment leader Joy Global, and farm equipment leader Deere (NYSE: DE), it is clear that the company has the ability to substantially grow margins by becoming the global leader in the segments of focus.

TEX Operating Margin TTM data by YCharts

To become a global leader, it appears that margins above 13% are possible providing another 30% upside if achieved. The company may not be able to reach that level on a diversified revenue base of only $10 billion, but clearly 10% should be only a intermediary target.

Rather notable in that chart is that the stocks with the highest margins heading into 2006 were able better maintain those margin levels. The lower the margin the more the amount plunged during the 2009 financial crisis.

Stock Valuation

The stock became overheated like the market when it went from $21 to $35 in the last three months, so investors would’ve been wise to have taken some profits before this selloff. As the stock settles down over the next month or so, investors might want initiate a position in this stock. With analyst estimates at only $3.44 for next year, the company could easily surpass those analyst forecasts based on the goals.

The stock trades at a similar forward multiple as the other heavy equipment manufacturers suggesting more upside with earnings growing faster as Terex normalizes margins.  

Conclusion

Terex remains a core holding though reduced after the Q4 results. The stock had become overheated along with the market. No doubt exists that a good management team should and needs to obtain higher margins from these business lines.

As the company mentioned, the existing divisions peaked at a revenue base of $11 billion so the $10 billion target is not aggressive. The real question is whether the company can squeeze enough margins to move earnings from a forecasted $3.44 in 2014 all the way to $5 in 2015. At that stage in the margin expansion and recovery, a 50% profit increase seems unlikely. The company will need to exceed estimates in the next couple of years to reach those goals.


Mark Holder and Stonf Fox Capital Advisors, LLC have a position in Terex Corp. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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