What Run-up? This Stock is a Still a Solid Buy

Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

This one’s definitely not for the faint-hearted! Terex’s (NYSE: TEX) ride on the graph has been nothing less than a roller-coaster this year. After doubling in value by February, its shares lost nearly 40% of the gains in the next three months. And when not many were paying attention to the construction-equipment maker, spectacular second-quarter numbers saw its shares jump by a whopping 26% in a single day!

Fool colleague Christopher Barker has tagged Terex ‘the industrial star of 2012’, and I couldn’t agree more. For those who think they missed the bus, take heart. Terex still has some steam left.

Riding on recovery and replacement
Terex’s top line grew 35% from the year-ago quarter, a major part of which was attributed to Demag Cranes, the Europe-based company it acquired last year. But sales were up 11% even if we exclude Demag’s impact—a decent growth given the global headwinds we have witnessed this year. Most of the growth came from North America as was the case with equipment king Caterpillar (NYSE: CAT), providing further evidence of the uptick in the construction market.

Interestingly, it's not just the new that’s driving sales. Sales in Terex’s largest division, aerial work platforms, climbed 25% backed by robust replacement demand in North America. A good chunk of demand, not just for construction-equipment makers but for truck makers as well, is coming from customers' need to replace aging equipment. In its second-quarter call, PACCAR (NASDAQ: PCAR) mentioned how its customers might be withholding expansions currently but are not shying away from replacing aging fleets. Such demand was one of the key factors in driving its truck deliveries up by 10%. Cat also feels the need to replace old equipment is boosting sales.

The surprise element in Terex’s numbers was the European region, though. Given that it accounted for nearly 29% of Terex’s top line in the past 12 months, crisis in Europe didn’t prove as detrimental to the company’s second-quarter numbers as expected. Sales from the region were better than last year, with businesses clocking higher single-digit growth through the first half of the year.

Climbing the hill on the right foot
Moving on, I think the Demag acquisition provides an excellent opportunity for Terex to deepen its global footprint. Demag Cranes has presence in five continents and 16 countries, including the high-potential emerging markets of China and India. Developing markets are playing a critical role in giving construction-equipment makers a stable platform under the foot.

Even peer Manitowoc (NYSE: MTW), which lags behind in terms of global presence, is upping the ante through investments such as a new crane facility in Brazil to tap growth opportunities. Both Terex and Manitowoc are in the race to capture the rough-terrain crane market in Brazil through local production and delivery initiatives. Terex also recently entered into joint ventures in China and Russia. Demag’s integration seems on track, and its addition should complement these moves to take Terex higher up the ladder.

Precise focus
Terex won’t be the best choice if you are looking for light-debt companies, but its war chest is getting bigger by the day, and liquidity isn’t really a problem. But what I like most about Terex is the way its gross margins have grown over the past few quarters. The trend continues—from 18% in the first quarter, it came at an impressive 21% clip this time. Higher gross margins are one of the best signs of management efficiency, and Terex has rightly termed it a priority. The company looks bang on track to hit its full-year gross margin target of 20%.

Foolish takeaway
Despite the massive single day run-up, Terex’s stock is still off nearly 30% from the highs it hit in February this year. But that’s not why you should be paying attention to it. A forward P/E of just 7 times, which is amazingly almost half of its trailing P/E, tells me there’s strong upside potential left in the stock. Terex still looks like a bargain, not one to be missed. 

Neha Chamaria has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend PACCAR Inc. 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. If you have questions about this post or the Fool’s blog network, click here for information.

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