5 Reasons That Could Set This Stock on Fire

By Neha Chamaria - October 30, 2012 | Tickers: CAT, DE, PCAR, TEX | 0 Comments

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Many do not pay much attention to a quarterly earnings report, which they feel only briefs us about how the company has fared in the past three months, a period too short to base judgments. The other school of thought believes an earnings report is more than just revenue and profit or loss figures, and if well understood, can actually give valuable insights into what’s going on within the company, and where it is headed.

I belong to the second school, and love delving deep into earnings releases to especially dig out more than what the numbers show. Take the case of construction-equipment specialist Terex (NYSE: TEX). Its third-quarter revenue remained flat, while earnings per share slipped 18% from the year-ago quarter. Yet, Terex managed to trample Street estimates, as adjusted earnings (excluding one-time items) were much higher than what analysts expected.

These figures by themselves don’t say much, and even make Terex look dull. Scratch the surface, and Terex actually appears to be one stock that deserves to be on your radar.

Spot-on Focus

Terex is doing one thing just right – working hard to boost its gross margin, which is one of the best indicators of management efficiency. It has maintained a steady upward trend for the past few quarters. From 18% in the first quarter, Terex’s gross margin climbed to 21% in the next, and remained at that level during the third quarter. What’s noteworthy is the way it expanded from 16% reported in 2011 third quarter.

Terex’s target of full-year gross margin of 20% looks achievable, and that would mean a significant improvement over 14% reported in 2011. Higher gross margins tell me Terex is managing its costs well – something every company needs to get a grip on in these trying times.

Proving Right

Terex’s third-quarter sales increased just 1% from the year-ago period, but if we strike off the contribution of the Demag Cranes acquisition, the number would have been worse (net sales excluding it slipped 8%). Which means two things – one, the acquisition is proving to be beneficial, and two, integration has remained on track. Many were skeptic about the timing of the acquisition, primarily because Demag Cranes is a Europe-based company. But Terex seems to have proved them wrong. It also helps that this is more of a services business, which helps Terex somewhat balance out when businesses like construction are hit due to cyclicality. With presence in five continents and 16 countries, Demag Cranes could prove to be the game-changer for Terex.  

On Firm Ground

Terex’s construction division and cranes division didn’t do too well in the third quarter – both reported lower sales compared to last year. But that’s not a company-specific issue. The world’s largest construction-equipment maker Caterpillar (NYSE: CAT) too reported flat third-quarter sales and a 7% dip in profits for its construction industries division from the comparable period last year. That’s largely because of softness in global markets. In fact, Terex’s construction division reported its first quarterly profit since 2008 in its second quarter this year.

Fortunately, the U.S. construction market is growing steadily, something that most companies are pinning hopes on, and one that should steer Terex forward. Caterpillar’s sales from North America climbed 9% in this past quarter, offsetting weakness in other markets. Deere (NYSE: DE), the tractor king which also runs a construction business that accounts for nearly 20% of its total sales, checked in with an impressive 23% rise in the division’s third-quarter sales, thanks to a robust U.S. market. Deere’s expectation of 17% full-year growth for the business also rides largely on the back of this market.

So as the U.S. market strengthens, things at Terex should only get better as it is also its largest and main market. It should be particularly advantageous as the company’s largest division, aerial work platforms, has kept its chin up even in times of crisis.

Better Days Ahead?

As the largest division that accounted for nearly 29% of the company’s third-quarter revenue, Terex’s aerial work platforms unit stands on firm ground. Sales at the division rose 17% during the quarter compared to last year, thanks to the North American market.

Two things should keep the momentum going – one, better selling prices, and two, rising replacement demand. Terex is going to increase prices by more than 3% next year, a move very similar to Caterpillar’s recent price hike announcement. Both these companies are probably expecting demand next year to be good enough to support higher prices. Customers’ need to replace an aging fleet could hold the key.

Terex acknowledged replacement demand as a major revenue driver, a sentiment others are echoing as well. PACCAR (NASDAQ: PCAR), in its just-released third-quarter earnings call, mentioned how customers seem to be more focused on replacing old fleets as they deal with global uncertainties. The truck maker, which reported 10% and 17% drops in third-quarter sales and net profits, respectively, from the year-ago period, further feels this ‘replacement cycle’ will play a critical role in generating revenue in the near future. This should hold good for Terex as well.

Knocking Down Debt

Terex is also working hard to reduce its debt which soared when it acquired Demag Cranes last year. The company paid around $300 million of high-cost debt in August, and has plans to redeem more in the coming months. Debt paid this year should reduce interest expenses by $44 million, the benefits of which should start getting visible from the fourth quarter onwards. Meanwhile, Terex’s operating margin improved significantly to 7.2% in the third quarter from 2.9% a year ago. This, coupled with decent interest coverage of 2.3 times should help Terex strengthen its balance sheet as the debt burden eases.

Thank God, There’s no cut Here!

Terex is probably one of the few companies that have stuck to its full-year guidance. It expects earnings to be between $1.95 to $2.05 per share and revenue to be around $7.5 billion. That’s a remarkable jump from $0.46 per share it earned in 2011 on revenue of $6.5 billion. Terex is certainly going to end the year on a high note.

For a company that is focused on improving margins, strengthening its balance sheet and effectively capitalizing on recent acquisitions, Terex is on the right track. I strongly urge you to add the stock to your personalized stock watchlist. Click here to add Terex.

Don't Miss This

In the world of heavy equipment, Terex may have had the hot hand lately, but Caterpillar remains the undisputed king. Read all about Caterpillar's strengths and weaknesses in our brand new report. Just click here to access it now.

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