Is The Game Over For This Stock?

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

This stock has rallied more than 8% since the last time I wrote on it, even etching a new 52-week high for itself some days back. That last time wasn't that long ago though, just a month. I had a hunch then that this one could rocket. It did.

The reasons I laid down still hold good for Terex (NYSE: TEX). Does that mean the stock has just embarked on a fresh rally? Or is it time to take some profits off the table?

Down, but not out

Every time a stock hits a new high, the first question that pops in my mind is whether the upswing is justified. For that, I usually go back and see how the company fared over the relevant time frame, because prudently, a well-performing company should see its stock price moving up. Terex’s performance metrics over the past twelve months present an unusually interesting picture. 

TEX Revenue TTM data by YCharts

The company’s revenue grew a meager 4%, but just look at the way its profits expanded! Gross profit improved a good 29% while net income surged a handsome 87% in the past one year. That’s the surest indication of how well Terex’s management has tamed costs – the best it could do in what was otherwise a pretty slow year for companies in the construction sector. In my previous post, I had mentioned another reason why I think so highly of the way Terex has expanded its gross margin – it is the only company in its immediate peer group that doesn't run a parallel business. For example, Caterpillar (NYSE: CAT) earned a greater part of profits from mining business last year, while Deere (NYSE: DE) raked in most of the money from its farm-equipment business.

I personally like companies that can convert incremental revenue into income. But the real question is – Is Terex as good when stacked against peers? Not quite. Take a look.

CompanyRevenue growth %Gross Profit Margin %Net Profit Margin %Debt-to-Equity %Return On Equity %
Terex 13.1 19.7 1.4 105 5.4
Caterpillar 9.5 28.6 8.6 229 37.4
Deere 13.3 30.5 8.6 435 44.7
Manitowoc (NYSE: MTW) 7.7 23.8 2.6 304 18.8
Oshkosh (NYSE: OSK) 3.9 12.6 2.9 53 13.9

Trailing Twelve Month figures
Source: Fool.com, Yahoo! Finance, Morningstar

Terex’s is a relatively sad story. Its margins don’t quite match up to rivals. Caterpillar and Deere sweep the board with good revenue growth and best margins. Manitowoc's revenue growth lags behind Terex's, but great cost control has helped it push margins even though its foodservice equipment is yet to show its true colors. Oshkosh has had to battle too many headwinds behind its defense business which took a toll on its top and bottom lines.

The only area where Terex outstrips peers is on a reasonably lower debt burden. Terex put in extra effort last year to pare down debt, results of which show up on its improved financials. More important, the crane maker made $106 million in net profit last year, but generated double the amount as free cash flow. That is certainly something you don’t get to see too often. I’d give Terex a brownie point here.

Interestingly though, despite being a slow performer, Terex currently commands the highest valuations among peers. The table will give you a clear picture.

CompanyTrailing P/EForward P/EPrice/Cash FlowDividend yield
Terex 39.2 11.8 13.9 NA
Caterpillar 10.2 8.5 11.1 1.7
Deere 10.9 9.2 30.2 2.1
Manitowoc  27.4 12 17.1 0.4
Oshkosh  16.3 12.1 15.4 NA

Source: Morningstar

At 39 times earnings, Terex is steeply priced. Throw in an expected growth rate of just 10% over the next five years with no dividends to match up, and the excitement around Terex fizzles. With lowest P/Es and tidy dividend yields, Caterpillar and Deere win this game as well, though Caterpillar's lower debt may make it a better bargain. Manitowoc appears expensive on both P/E and price-to-cash-flow terms, and Oshkosh might offer better returns at current price. Oshkosh even upgraded its full-year guidance recently.

Only, the dramatic drop in Terex's forward earnings means the market expects earnings to grow at a swift pace in the near future. Analysts actually see Terex grow by a staggering 41.6% this year.

Could the Street probably be expecting too much from Terex? If Terex can grow at that rate, it would be phenomenal. But unless it translates all that growth into increased shareholder value, its stock price might have a tough time keeping pace. Terex’s dismally low return on equity of 5% compels me to think so. Free cash flow that’s twice the profits sounds encouraging as well, but again, will Terex be able to sustain it? More important, $210 million of cash flow is a mere 10% of Terex’s current long-term debt and just a fraction of its nearly 4 billion market cap.

Will Terex make it?

While Terex seems to be doing a great job at controlling costs (latest announcements include pulling down the shutters on several businesses in Germany), I feel it really needs to boost its top and bottom lines. Terex has lagged most peers in terms of net income growth in the past five years.

The biggest challenge perhaps will be to make sure it can get material stuff out of Demag Cranes that it acquired in 2011. Being Europe based, successfully integrating Demag must probably be an uphill task for Terex right now. It could probably use Demag’s presence in other global markets to its advantage while Europe rises from the ashes. Meanwhile, an uptick in the North American construction markets should work in Terex’s favor.

My verdict: There’s nothing wrong with Terex’s long-term story. Only, I’d probably like to see faster growth to justify its premium valuations. Booking some profits now might pay off, as you may get a chance to dive in again later at a reasonable price. If you want to get your hands on something now, why not consider a Caterpillar or a Deere instead? Both look undervalued for their solid growth stories as suggested above. Meanwhile, don’t let Terex out of your sight as a dip may present an opportunity. Click here to add Terex to your stock watchlist.




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!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure