Is Terex the Right Industrial Sector Stock to Own to Ride the Economic Recovery?
Highlights:
- Heavy gov’t spending on infrastructure drives top-line growth
- Costs cuts to drive sustainably higher margins
- Strong ROE and ROIC might be overlooked by the market
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Terex Corporation’s revenue breakdown 2020
Sideward movement could last much longer
- Throughout the past year, the stock price mainly moved sideward
- Since 3Q21, the 50DMA moved in line with 200DMA, providing no clear signal yet
- Volume RSI has been weak recently
- Currently, it is at the 50%-line, which also does not help to derive a meaningful conclusion
Heavy gov’t spending on infrastructure drives top-line growth
- Most of Terex customers are dependent on gov’t funding for infrastructure projects, e.g., highway construction
- The US gov’t has increased its spending by over 50% in 2020 and 2021 compared to previous years
- The heightened level of spending is likely to stay over the next few years, providing good growth opportunities for the industrials sector
Near-term strength already reflected in backlog
- In 3Q21, Terex’s backlog stood at US$2.7bn, which is double than the average backlog of previous years
- Therefore, I expect strong revenue growth in the upcoming 3 years
Costs cuts to drive sustainably higher margins
- Terex continued its efforts to reduce its costs and drive its margin closer to the level of its competitors
- Therefore, the management considered divestments of inefficient business
- In 2019, Terex sold its crane business
- The efforts start to pay off as the operating profit achieves a higher level
- I see some more room for the operating profit to expand
Strong ROE and ROIC might be overlooked by the market
- Both ROIC and ROE could climb up to 20% in 21E
- The company needs to prove itself to maintain such a heightened level of profitability
- If the company is able to do so, it could be a key catalyst for a re-rating
- Given the strong demand outlook, I believe that the market should be more optimistic about the profit growth
FVMR Scorecard – Terex Corporation
- A stock’s attractiveness relative to stocks in that country or region
- Attractiveness is based on four elements
- Fundamentals, Valuation, Momentum, and Risk (FVMR)
- Scale from 1 (Best) to 10 (Worst)
Consensus sees strong upside
- The majority of analysts issued a BUY recommendation, while 6 analysts recommend a HOLD
- Consensus expects strong revenue prospects, and a rising margin
- Considering growing infrastructure spending, the company could realize the targets
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P&L – Terex Corporation
- The company is likely to turnaround its loss in 2020 and recognize strong profits in 21E and 22E
Balance sheet – Terex Corporation
- Significant increases in inventories and receivables as sales volume likely to ramp up as shown by the strong backlog
- The company started to reduce its long-term debt
- In 3Q21, its net debt-to-equity ratio stood at 0.3x, compared to 0.6x in 2020
Ratios – Terex Corporation
- The company is characterized by a strong efficiency, which also boosts future return on equity
- With the increased focus on its most profitable products, Terex could return to a gross margin above 20%, with further room to improve over time
Long-term share price performance potential
Free cash flow – Terex Corporation
- FCFF has been consistently positive, and there is no reason to assume differently in the future
Value estimate – Terex Corporation
- Similar to consensus, I expect strong revenue and a margin improvement
- Terex is likely to ride the demand wave induced by gov’t infrastructure support
- The company is highly cyclical reflected in the above-average beta of 1.25x
World Class Benchmarking Scorecard – Terex Corporation
- Identifies a company’s competitive position relative to global peers
- Combined, composite rank of profitability and growth, called “Profitable Growth”
- Scale from 1 (Best) to 10 (Worst)
Key risk is intensified price competition
- Low-cost competitors from China could result in loss of customers
- Its customers are dependent on gov’t spending
- Dependency on suppliers can lead to volatile margin
Conclusions
- Ramp up of gov’t infrastructure spending makes it worth to look at industrial companies
- Terex has room to expand its margin, making it a profitable growth play
- Valuation is relatively cheap, trading at a 50% discount
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