It’s About Time You Started Taking This Stock Seriously

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

After a strong run for a month through the end of March, Terex’s (NYSE: TEX) stock had hit a point where I thought it may be time to take some profits off the table. Fools who paid heed must be a happy lot, as the stock has lost 17% since then.

A disappointing first-quarter earnings report last week ensured that the stock remains in the red. Yet Terex is hopeful about a good year ahead. What should you make of the numbers and what should you do with the stock now?

The tailwind

Terex’s biggest strength is its aerial works platforms business, which is also its largest division, accounting for 30% of total revenue. Sales from this business surged 21% year over year in the first quarter. It’s more of the need to replace an aging fleet that’s prompting customers to buy equipment. Oshkosh (NYSE: OSK), Terex’s closest competitor in the AWP business, had pointed out how replacement demand helped sales from its access equipment business grow 15% year on year in its last quarter.

Customers usually rent out equipment like lifts, booms, and trailers to contractors and builders. With the construction market, especially in the U.S., witnessing an uptick recently, replacement demand has emerged as one of the biggest drivers for construction equipment. Oshkosh gets a third of its revenue from this business and is pinning hopes almost entirely on it for growth in the near future, as its other business of defense vehicles hit a roadblock because of significant budget cuts by the government. Terex’s good AWP performance is encouraging news for Oshkosh’s investors as the company is set to report numbers in a few days. Analysts are expecting Oshkosh’s earnings per share to more than double from last year.

Right move at the right time

In fact, if it were not for aging fleet, these equipment makers would hardly be selling anything. In Caterpillar’s (NYSE: CAT) own words (heard during its latest earnings call), “Most of what we sell is for replacements.” Expanding its rental-equipment business is one of the top growth plans on Caterpillar’s list right now. The world’s largest construction-equipment maker reported a destructive 17% slip in sales from its construction industries business this past quarter. The bigger blow, however, was its mining-equipment business (known as resource industries) with a 23% decline in sales. Caterpillar forecasts its sales for new mining equipment to slump by a massive 50% this year.

Terex would have suffered as badly had it not changed its business portfolio in recent years. In 2008, 80% of Terex’s revenue was dependent on mining and construction markets. By 2012, that figure was down to 50%. By construction market, I mean the market for equipment like backhoe loaders, dumpers, and mixer trucks. Over the years, Terex started concentrating more on lifts (constituent of AWP business) and cranes while adding newer product lines like port equipment. Post the acquisition of Europe-based Demag Cranes in 2011, Terex today enjoys the second position in industrial cranes and third position in port equipment solutions globally.

Bucking up

Expanding its cranes business looks like a good idea. Research company Technavio projects the global crane market to grow at a compounded average rate of 7.6% between 2012 and 2016. With Demag, Terex has spread its wings over five continents and 16 countries, giving it an edge over close rival Manitowoc (NYSE: MTW). The cranes business, which makes up more than 60% of Manitowoc’s total revenue, recorded an 11.6% rise in sales in the last quarter. While Terex’s revenue grew 13% in the trailing twelve months (excluding the latest reported numbers), Manitowoc reported less than 8% growth in revenue during the same period. Also, the crane business is proving to be a high profit churner for Terex -- In the first quarter, operating earnings from the business was one and a half times greater compared to the year-ago quarter.

Only, Terex hasn’t gained as much as it expected from the Demag acquisition because of the Europe factor. Sales from its material handling & port solutions business fell 23% in the first quarter. Persistent weakness in the European market has compelled Terex to overhaul the business. That would cost between $30 million and $50 million in the second quarter. Terex expects ‘similar amount in savings’ over the 12-24 months. That’s not too encouraging, and I guess Terex will have to rely more on a recovery in Europe to get this business on track.

Terex also needs to work hard on its margins. Though its first-quarter gross margin expanded 100 basis points year over year to hit 19.2%, it is the lowest among its peers. For the trailing twelve months, Manitowoc sported a 24% gross margin while Caterpillar boasted a margin of 28.6% for the same period. Only Oshkosh lagged behind with 12.6% gross margin.

The Foolish bottom line

One bright spot in Terex’s first quarter was a 7.8% sequential increase in backlog value. If Manitowoc also reports higher backlog (its earnings will be out soon), it will confirm the strength in the industry. Moreover, despite a dismal first quarter, Terex stuck to its full-year guidance of revenue between $7.9 billion and $8.3 billion. At the lower end, that would be an 8% improvement over last year. Earnings per share (adjusted) guidance looks good at $2.40 to $2.70 per share. Terex earned $1.83 adjusted earnings per share last year.

At current prices, Terex’s stock looks a little overvalued at 31 times trailing P/E, especially when peers are trading for much cheaper. I think there’s some downside left in Terex’s stock. But every dip is a buy as Terex’s strong business line and growth plans makes it a good long-term bet. Click here to add Terex to your stock watchlist.

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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!

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