2023-08-04 15:24:52 ET
Summary
- Terex Corporation has posted a strong Q2 2023 Earnings report and increased its FY 2023 guidance based on high backlog and strong demand.
- Over the last year, the stock has rewarded investors with 85.39% returns.
- Cautious of the cyclical nature of the stock due to its proximity to industries such as mining and construction.
Terex Corporation ( TEX ), a mid-cap heavy equipment manufacturer stock, posted an impressive Q2 2023 Earnings report on August 1st, showing substantial growth in sales and EPS compared to the previous year. The management team has emphasized a historically high backlog at $3.7 billion and improved the outlook for FY 2023. Over the last year, the stock has rewarded investors with 85.39% returns.
Historic stock trend (SeekingAlpha.com)
Additionally, Terex seems well-prepared to take advantage of infrastructure investments, digitisation, clean energy, and waste recycling trends. While cautious about macroeconomic and supply chain challenges and the cyclical nature of the stock, over the short term, we can gain confidence in its healthy backlog and sufficient capacity to meet growing demand. As a result, I think investors may want to consider a bullish approach to the stock.
Company overview
Terex is a leading US heavy equipment manufacturer for mining, construction, transportation, and utilities. Their machinery includes cranes, construction equipment, materials processing equipment, and aerial work platforms. Terex's solutions are available through direct sales, rental, leasing services, and equipment financing. They provide innovative solutions to customers globally, although North America remains their largest market.
Sales by geographic region (Sec.gov)
Terex is known for producing reliable and durable equipment, remaining a significant player in the heavy equipment market. It generates income through two segments, Materials Processing (MP) and Aerials and Utilities (AWP), which have both seen significant year-on-year growth in the most recent earnings report.
Revenue and income by segment for Q2 2023 versus Q2 2022 (Sec.gov)
The company offers solutions and equipment crucial to critical billion-dollar industries, such as new products for forestry and waste recycling, that attract customers due to the effectiveness and efficiency of these offerings. Their focus is on developing new products with good margins. One example is their investment into battery technology through their partnership with Acculon to capitalise on market trends and growth opportunities.
Industry growth indicators (Investor presentation 2023)
Growing demand and adequate capacity
Terex has a backlog of $3.7 billion , indicating a strong demand environment with good visibility into 2024. The company assures it has enough capacity to meet growth needs if demand increases. Based on a strong performance the management have raised its FY 2023 guidance to net sales of $5.1 billion with an operating margin increase to 13% and an expected annual EPS of $7.00.
Full year 2023 guidance raise (Investor Presentation 2023)
Financials and valuation
Over the past two financial years, Terex has been improving both its top and bottom line performance. Thanks to robust demand across its segments, it is well on its way to achieving a strong FY 2023.
Annual income statement (Marketscreener.com)
If we look at the most recent earnings report , YoY, the company has increased its total revenue by 30% to reach $1.4 billion, expanded its operating margin to 15%, and operating profit has grown by 102% YoY to reach $210 million. For Q2 2023, the company posted an EPS of $2.34, which beat consensus by $0.72.
Year-over-year performance improvements (Investor presentation 2023)
This company has a robust financial position with $297.7 million in total cash. As a result, it has been able to reward its investors, decrease its debt, and expand its capacity to meet demand. The quarterly dividend has been raised by 31% year to date, but the FWD yield is still relatively low at 1.07%.
Dividend overview (SeekingAlpha.com)
Furthermore, the company has reduced its net debt by 68% since 2015, and if we look at liquidity, we can see that the current ratio is 2.07 suggesting that it can cover its short-term liabilities. If we look at cash flow, the company has a positive levered free cash flow of $170.24 million TTM, which has increased over the last two financial years.
Balance Sheet and liquidity (Investor presentation 2023)
Terex is currently trading below its average analyst price target of $67.53 . After the recent earnings report, Baird and Goldman Sachs Analysts increased their average target price and maintained a neutral rating on the stock. Over the last year, Terex has been a more rewarding stock to hold over the last year if we compare it to Caterpillar ( CAT ), Japanese multinational Komatsu ( OTCPK:KMTUY ), CNH Industrial ( CNHI ) and Chinese manufacturer Zoomlion Heavy Industry Science and Technology ( OTCPK:ZLIOY ).
One year price return (SeekingAlpha.com)
Additionally, when comparing the company to its industry peers, we can observe that its forward price-to-earnings ratio of 8.96 is lower than some of its major competitors like Caterpillar, which may suggest that the stock is undervalued. Furthermore, the company's price-to-sales value is below one at 0.92, indicating that investors are paying less than a dollar for every dollar earned by the company.
Relative peer valuation (SeekingAlpha.com)
Risks
Before investing in Terex, it's important to be aware of the potential risks involved. The company's business is sensitive to economic downturns, especially in the construction and mining industries , which may lead to lower demand for its heavy equipment. There's also a risk of facing pricing pressures and losing market share due to intense competition in the market. Compliance with regulations and environmental standards may lead to higher operational costs. Terex's global operations expose it to currency exchange rate fluctuations, which could impact its financial performance. Moreover, the company's high level of debt could limit its financial flexibility and lead to increased interest expenses, potentially impacting its profitability.
Final thoughts
Terex had an outstanding second quarter, with a backlog of $3.7 billion, which is three times higher than its typical historical norm. This suggests a strong demand for their products and positive growth potential. Consequently, the FY 2023 guidance has been raised. Terex has shown adaptability and resilience in the market with increased sales growth, expanded operating margins, and a focus on fast-growing industries. However, investors should keep in mind that the stock is historically cyclical. Despite this, I think Terex's current performance and market position make it an attractive option for investing in the heavy equipment manufacturing industry. Therefore investors may want to take a bullish stance on this stock.
For further details see:
Terex Corporation: A Strong Q2 Performance Fuels Growth Prospects