Shares of the construction-gear maker could recover nicely as investors wake up to its strong profitability and exposure to global markets
Investors who discovered and bought shares of heavy-equipment maker Terex (TEX) in 2003 or 2002, when they were trading at $19 to $21 a share (unadjusted for subsequent stock splits) would have ended up with a bonanza—had they held on. The stock zoomed to a high of 132 in 2006, after which it split two-for-one, to 66. The stock continued to soar even after the split, to a new high of 96.90 in mid-2007.
Since then, however, Terex has slumped, to 54 on July 1, hammered by its link to the construction industry. But dumping the stock, as many investors have done recently, could prove to be ill-advised. Terex is a global manufacturer of a broad range of heavy-duty trucks, mobile cranes, and aerial platforms used mainly in infrastructure construction, such as highway and road-building, and surface mining. And more important, some 70% of Terex's total 2007 revenues of $9.1 billion was generated outside the U.S., including Asia, the Middle East, and Eastern Europe.
Once the big institutional investors open their eyes to this fact, they will plow back into the stock.
"Encouraging levels of investment activity in the emerging markets' infrastructure sector affected strong demand for cranes, mining, and aerial work platform equipment," which are Terex's high-margin businesses, wrote Columbine Capital Services in a report to clients, in which it recommended buying Terex shares. It noted that the housing industry's problems are expected to spill over to the U.S. nonresidential construction sector and trigger a slowdown in activity. Nonetheless, "Terex is positioned to grow amid tougher economic trends" with a 53% order backlog of $4.1 billion, noted Columbine.
Such optimism is shared by several close followers of Terex. Mathew Christy of Standard & Poor's predicts Terex will see order and sales growth at double-digit percentage rates over the next several years, driven by worldwide demand for cranes from large infrastructure projects, as well as growth in the material processing and mining equipment segments, because of the continued global appetite for commodities. (S&P, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP).)
"The global infrastructure and commodity cycles are still in their early stages and should continue to expand," says Christy, who rates Terex a strong buy.
The strong first-quarter results at Terex demonstrate that demand for cranes and mining equipment is showing no signs of slowing. Terex reported first-quarter earnings of $1.59 a share, way above analysts' consensus forecasts of $1.41. And revenues of $2.3 billion were in line with consensus figures. "The current valuation of the stock does not fully reflect all of Terex's near-term positives and growth prospects," argues Charles Brady of BMO Capital Markets, who rates the stock outperform, with a 12-month price target of 90. He figures Terex will surprise the skeptics with strong top- and bottom-line results for the next three years.
Brady forecasts Terex will earn $7.10 a share on revenues of $10.9 billion in 2008, $9.20 on $12.1 billion in 2009, and $9.50 on $13.1 billion in 2010. In 2007, Terex posted a profit of $5.95 a share on revenues of $9.1 billion.
Good Deal, Great Prospects
The big drop in Terex's stock since mid-2007 indicates that investors who bailed out had factored in a very disappointing outlook for the company, based mainly on worries over the U.S. housing meltdown and the credit crisis. Andrew Casey of Wachovia Capital Markets (WB) says the big sell-off in the stock was "overdone, considering Terex's attractive long-term earnings growth potential." He thinks the stock is inexpensive when viewed against the company's earnings goals and big exposure in the booming international markets. Terex Chairman and Chief Executive Officer Ronald DeFeo says the company will continue its geographic expansion through acquisitions and by putting special emphasis on developing areas, such as China and India.
Indeed, Terex is trading at a huge bargain, selling at about half of what it was last year—with the company having grown robustly since then—and facing greater prospects in the years ahead. And all that amid a sharp U.S. economic downturn. Can you imagine where the stock will be when the economy begins to dig out of its slump?