Today’s Daily Alert features a unique stock in the capital goods space from Benjamin Shepherd’s Wall Street.
“The global economic downturn hit heavy-equipment makers really hard. But now most of them are back on their feet and going strong. We especially like Westport, Conn.-based Terex Corp. (TEX $29 NYSE), whose recovery is likely to be more robust than most of its peers.
“Last year, Terex’s adjusted earnings (not including special items) jumped fourfold to $1.83 per share, on a 13% increase in revenue (to $7.4 billion). The consensus is that earnings will rise another 40% in 2013, to $2.55 per share, driven by higher margins and aggressive new product launches.
“Focusing on higher-margin niches. In the past five years, Terex has shifted away from competing head-on with giants such as Caterpillar (CAT) to focusing on niches where it has a competitive advantage. In 2010, for example, Terex sold its mining-equipment business and bought Demag, a maker of port cranes. The port-equipment division recently landed several major projects at the new Maasvlakte II port in the Netherlands, ultimately worth several billion dollars.
“In fact, close to 60% of Terex’s revenue now comes from specialized equipment: aerial-work platforms, mobile cranes, materials-processing equipment, and equipment for ports. And Terex is a market leader in most of these segments. In aerial-work platforms (20% of sales), Terex’s Genie is one of only two major brands, along with Oshkosh’s JLG unit.
“Improving markets. About 35% of Terex’s sales are in developing markets, where governments are spending heavily to improve infrastructure. Between now and 2018, for instance, India will spend $1 trillion; China recently approved $150 billion in new spending; and Thailand another $75 billion over the next few years. Terex is constantly expanding its offerings, recently introducing new boom and scissor lifts in China in response to the government’s new scaffold-safety regulations.
“In addition, the U.S. commercial construction market has begun to show signs of life, resulting in higher sales of both cranes and aerial platforms. Europe is about 30% of Terex’s revenue, and the recession there will continue to be a challenge. However, improvement in U.S. construction and heavy infrastructure spending in Asia should continue to benefit the top line.
“Rising profitability. Terex’s goal is a 10% operating profit margin on sales of $10 billion for 2015. This seems doable. Last year, the operating margin more than quadrupled to 5.4%. And three out of the company’s five major divisions already have margins of 10% or more. Near the peak of the last cycle in 2007-08, the operating margin hit a high of 10.5% on sales of more than $9 billion.
“Still, around 40% of Terex’s sales are from traditional construction equipment, where profit margins are hovering around 3%, just over half the firm’s overall level. Terex plans to shed less-profitable segments here, such as road-building equipment. And unlike many of its competitors, Terex outsources some of its major components, such as engines, instead of building them in-house. This allows Terex to avoid major capital expenditures and research costs — boosting returns on invested capital.
“As profitability improves, Terex is using the excess cash flow to pay down debt. And by the end of 2015, the company expects to have little or no net debt.
“Recently priced at around 10 times 2013 earnings estimates, Terex’s shares should continue their upward momentum, albeit with considerably higher volatility than the overall market.”
- Benjamin Shepherd, Benjamin Shepherd’s Wall Street, May 2013