2024-01-02 06:27:00 ET
Summary
- Terex Corporation is a compelling investment opportunity with a quality business that cares about its shareholders.
- Its products are distributed across numerous applications and they are proportionately benefitting from the economic policies set by the U.S.
- All their metrics trending up, supported by infrastructure projects and increased demand in multiple end markets.
- It is attractively valued and it is a rare opportunity to find a quality business that is so well-positioned in terms of valuation.
- I rate this as a Strong Buy over the short to medium term.
When I analyze stocks for potential investments, Terex Corporation (TEX) emerged as a compelling investment opportunity in many aspects. On a macro level, the company's business makes it a key beneficiary of the economic policies, and on a fundamental level, it's a quality business that cares about its shareholders. It is hard to find an investment thesis that fits so many aspects that I look for and I thought it was a rare find. I will be investing in this company and will lay out the thesis below.
The Business and Tailwinds
Terex Corporation works within the realm of construction sector but it wears many hats. The company does say it looks remarkably different than when they initially laid down its roots and this evolution happened over decades through acquisitions and divestitures. Currently, this is the company's focus, broadly classified under two segments: Materials Processing and Aerial Work Platforms.
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Manufactures a variety of lifts and platforms under the umbrella of Aerial Work Platforms ((AWP)) used for tasks such as construction, maintenance, and repair at elevated heights. These products include boom lifts, scissor lifts, and telehandlers.
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Manufactures and sells a diverse range of cranes, including mobile cranes, tower cranes, rough terrain cranes, and crawler cranes. These cranes serve applications in construction and infrastructure development.
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Manufactures equipment for material processing, including crushers, screens, washing systems, and related equipment used in the mining and aggregate industries.
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Manufactures construction equipment such as compact track loaders, compact excavators, and site dumpers which cater to the needs of construction projects.
- The company sees the following as its end markets for its products: Infrastructure, Utilities, Commercial/Industrial, Recycling and General Construction.
- It manufacturing base is wide and is all over world (Canada, U.S., India, China, U.K, etc.)
The number of applications for the company's products are too vast to be covered here and deferring to their 10-K is the best way to be informed of all the applications. But the tailwinds that could affect the company are beginning to pick up steam.
The Biden administration has initiated 40,000 infrastructure projects, investing over $400 billion in rebuilding America as part of a $1 trillion infrastructure bill signed into law two years ago. The projects cover a wide range of areas, including airports, bridges, roads, electric vehicle charging stations, and expanding internet access. While the administration's goals could be political, the end results would obviously positively impact many areas and act as tailwinds for the segments the company operates in. We will dive into this more but just to provide a taste of how things have been trending up for the company we can look at the backlog growth in 2021 and 2022.
Even though this accounts for global customer demand including U.S, for the AWP segment, the growth was driven by robust demand primarily in the U.S.
Trending Up
Revenues have started trending up post Covid and for LTM we are seeing revenues of $5.1B. For the latest quarter, we saw double digit growth of 15% in revenues, 35% growth in operating profits and operating margins expanded by 1.9% all of which resulted in an EPS growth of 46%
Overall, the uptrend is not only observed in the topline but also in the margins and EPS as well. Full Year EPS outlook has also been raised to $7.05. The company credits boosts to multiple end markets for the rising trend in its business. Outside of the infrastructure demand supported by IIJA (Infrastructure Investment and Jobs Act) which we briefly covered earlier there are a few additional factors supporting this trend:
- Demand supported by onshoring with U.S. manufacturing construction spending up 63% over the prior year.
- U.S. non-residential spending up over 16% from prior year (Majority supported by government stimulus)
- Utilities related spending up 10% over the prior year
The future also looks bright. Customer backlog is at $3.3B almost 3 times the historical average. The company has been actively working to reduce its backlog but low materials processing inventory levels have been reinforcing the backlog.
The trend in not just restricted to the company's business growth. Terex holds a total shareholder equity of $1.5 billion and carries total debt amounting to $700 million, resulting in a debt-to-equity ratio of approx. 50%. What is even more attractive is the fact that the last five years have seen this coming down by more than 50%!
The company's total assets and total liabilities stand at $3.5 billion and $2.0 billion, respectively. Terex's EBIT is $638.0 million, yielding an interest coverage ratio of 11.7. Additionally, the company holds cash and short-term investments of approx. $350 million. Overall, I am happy about the fact that the growth of the last two years did not come at the cost of balance sheet.
Benefitting shareholders
In addition to paying a dividend (which have been increasing and are well covered by its cash flows), the company also actively buys stock.
The net effect of these two will boost returns for shareholders and again I am happy about the fact that there is a big uptrend here in terms of returning value for shareholders.
Valuation that does not reflect the potential
I think this is where our core opportunity lies. It trades just at 8 times current earnings and 6 times for EV/EBITDA. These are well short of Industrials sector medians. In fact, every valuation metric across the board are showing this as undervalued when compared to the sector median.
Considering that we are seeing consistent growth in earnings, the price of the stock has not been keeping up with this growth (reflected well in the PEG ratio). I do not fully understand the reasons for this as the outlook remains bright and as we have seen, the infrastructure push for the next few years will continue to benefit the company. This is where I think we need to grab the opportunity and our upside remains high. The stock has been up 37% for the year but there is still enough room for this to run higher.
How low can this valuation go?
Hard to pin an exact number considering the tailwinds that we see. So, in such scenarios, I find it helpful to model this across a range.
If we continue to see improvement in the bookings and margins, there is every reason to believe that valuations will drift even lower from here. I believe every drop in valuation would be a buying opportunity for the next 2 - 3 years or unless the company provides a bad update.
Company | PE | EV/EBITDA | P/B | P/CF |
Caterpillar Inc. ( CAT ) | 16.8 | 11.4 | 7.3 | 13 |
Deere & Company ( DE ) | 11.5 | 10.3 | 5.1 | 13 |
Manitowoc Company, Inc. ( MTW ) | NM | 5.11 | 1.02 | 5.82 |
CNH Industrial N.V. ( CNHI ) | 7 | 11.4 | 2 | 19 |
Komatsu Ltd. ( KMTUY ) | 10.01 | 6.56 | 1.29 | 10.04 |
Allison Transmission Holdings, Inc. ( ALSN ) | 8.26 | 6.87 | 4.40 | 6.76 |
Federal Signal Corporation ( FSS ) | 32.25 | 18.65 | 4.89 | 35.86 |
Terex Corporation ( TEX ) | 8.18 | 6.28 | 2.56 | 9.09 |
As a continuation of this valuation exercise, I tried to zoom in and identify companies whose business closely aligns with that of Terex Corporation. I ended with a list of 7 companies and when I extracted their multiples it was clear to me again that Terex corporation was undervalued and its valuation does not reflect its potential.
Strong Buy
I reserve my Strong Buy ratings only for my high conviction names and I believe this is one of them. The business is on a upswing, its balance sheet is robust, valuation is compelling and it is utilizing its cash flow to provide additional returns to shareholders.
It is also positioned to benefit from the current economic policies. The only risks I see is with respect to the time length of the investment. I believe this is more of a short to medium term hold as over the long term, cyclical effects of this industry may take hold and result in sub-par returns. But as they say we will cross that bridge when we come to it!
For further details see:
Terex Corporation: A Winner In Multiple Aspects