Why You Should Dip Your Fingers in This Sizzler
Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It was a pleasant October day last year when I decided to make the most of my recharged research side of the brain. This company had just-released its quarterly report, and although it beat Street estimates, the numbers were far from good. Over a tea (I am not much of a coffee girl) conversation, my colleague felt there were much better companies to bet on than this one. Not convinced, I delved deeper. This was my final verdict: Terex (NYSE: TEX) could soon be on fire.
Terex proved me right: Its stock is up nearly 50% from that day. What did Terex do right? Will it outperform in 2013 as well? Is it still a buy?
Winning the race
Right at the beginning of 2012, Terex had set its priorities: Improve margins, strengthen its balance sheet, and manage a recently acquired company better. Terex didn’t lose track.
2012 proved to be a tough year for construction-equipment makers as critical markets like China went into deep slumber and the U.S. market just about managed to get back to its feet. As growth proved hard to come by, Terex directed focus on scaling back costs to improve margins. The results show in its numbers. I charted quarterly gross margin growth for Terex and its peers over the past three years, and this is where Terex stands.
The contrast is striking. While Caterpillar (NYSE: CAT), Manitowoc (NYSE: MTW), Deere (NYSE: DE), and Oshkosh (NYSE: OSK) have seen their margins trip over the three-year time frame, Terex’s gross margin grew a whopping 72%. This, despite every rival having at least one complementary business for support, unlike Terex. Caterpillar has a profitable mining-equipment division to offset any weakness in its construction business while 40% of Manitowoc’s revenue comes from the equipment it supplies to the food-service industry. Deere’s tractors are used worldwide, and construction is just about 20% of its business. Oshkosh was the outlier with the biggest drop in margins as its defense business tanked.
Terex clearly stumped everyone in this game with an amazingly high gross margin, and the gap has only widened. And as you can see, most of the bump came around in 2012. Cost containment was the key, and will remain so this year. Terex’s construction division is on top of the list. The business has been a drag – sales slipped 13% and losses more than doubled last year compared to 2011. Terex is selling off some road-building product lines in Brazil and the U.S. while exiting from Germany, to do away with poor-returns businesses. Cost cutting in other units will provide support and boost its margins further.
Terex’s balance sheet presents an equally compelling picture. It took on huge amounts of debt when it acquired Demag Cranes in 2011. Since then, successfully integrating Demag and easing debt burden have become top priorities.
Terex’s debt-knocking actions gained pace last year as it paid off nearly 9% of the long-term debt outstanding at the end of 2011. Note the sharp dip in Terex’s debt-to-equity ratio in the second half of 2012. Terex resorted to a mix of replacing high-cost debt with low-interest ones and extended its debt portfolio maturity be nearly four years. That eases interest pressure, and gives the company more time to de-leverage.
At the same time, Terex’s operating margins have inched higher, settling at around 5.3% for the trailing 12 months from just 1.3% in the comparable period last year. That automatically adds cushion to the company’s debt-servicing capacity. As you notice in the graph above, Terex’s net income has just about crept up, but its free cash flow has grown swiftly since mid-2011. As it slashes costs further and pays down debt this year and beyond, the numbers should only get better.
The growth catalyst
As if macro headwinds and debt concerns weren’t enough, Terex also had to prove critics wrong when they questioned the timing of its Demag acquisition. After all, Demag had its base in the beleaguered European region. But numbers say Terex has done well on integrating it into its business. Its full-2012 net sales improved 13% from 2011 levels, but as much as 10% of it was from the acquisition.
Terex plans to stay away from acquisitions at least for the next couple of years, and aims to grow organically by tapping existing opportunities. It has even outlined goals through 2015 – earnings per share of $5 on $10 billion sales. To put that in perspective, Terex earned under $1 per share in 2012 on $7.3 billion of revenue.
The growth should largely come from its aerial work platforms business, which is also its largest. Numbers of orders it booked last quarter were the highest in four years. For 2013, Terex expects it to outperform with 15% to 25% growth in sales as replacement demand edged up.
It’s an industry-wide emotion. Solid performance in its access equipment business even prompted Oshkosh to up its full-year guidance. Both volumes and prices are improving. If Terex and Caterpillar raised product prices by around 3% in January, Oshkosh’s hike ranged from 5% to 8%. As demand firms up, so should prices.
Should you buy?
That brings up the billion-dollar question: Is Terex still worth a bet at current prices? If we go by analyst estimates, only a fool (with the small f) would miss it: They expect the company to grow a staggering 42% this year. If we go by valuations, a Fool (this time it’s a cap) might give it a miss – Terex trades at 35 times earnings (as on Feb. 22), more than double of most peers.
The answer could lie midway – a forward P/E of 9.4 means there’s immense upside potential; and markets are indeed improving. Personally, I wouldn’t dive in right now, but any pull back will attract me. To stay updated on Terex’s growth story, add it to your stock watchlist. Click here to add it.
Neha Chamaria has no position in any stocks mentioned. 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!