On Aug 21, we issued an updated research report on Terex Corporation (TEX Quick QuoteTEX - Free Report) . The company is well positioned to deliver improved 2018 results driven by its focus on the Execute to Win strategy, stable global crane markets, product development and backlog strength. The company’s disciplined capital-allocation strategy and backlog strength is likely to fuel growth. However, supply-chain challenges in mobile crane operations and higher input costs remain near-term headwinds.

 

Let’s analyze these factors in detail.

 

 

Terex raised 2018 adjusted EPS guidance to $2.80-$3.00 from $2.70-$3.00, reflecting year-over-year growth of 111% at the mid-point. This upbeat outlook is driven by strong first-half results, capital-market actions, and operational improvements over the balance of 2018. Terex anticipates sales to be up 18% (from the prior projection of 15%) to about $5.1 billion in 2018. The upswing came on the back of higher sales in the Aerial Work Platforms (“AWP”), Material Processing (“MP”) and Cranes segments. For the sixth consecutive quarter, Terex’s backlog grew year over year in every segment. Improving backlog, along with an enhanced global market & environment positions the company well for 2018.

 

 

Terex’s Execute to Win strategy is focused on improving capabilities by investing in people, processes and tools in three priority areas, comprising commercial excellence, lifecycle solutions and strategic sourcing. For this, the company recently approved an investment in its Utilities business to build a new facility in Watertown. This state-of-the-art manufacturing center will aid in consolidating 10 buildings into one, while meeting the growing needs of utility customers. Terex has also implemented a new operational financial management system under which it will provide a continued view of internal financial information across its businesses.

 

 

Terex continues to execute its disciplined capital-allocation strategy in 2018. Over the past 18 months, the company has repurchased around one-third of its outstanding shares for around $1.25 billion achieving attaining the mid-point of its $1-$1.5 billion commitment, well ahead of schedule. Terex recently announced a new $300 million share repurchase authorization. Further buybacks will support the stock. The company reiterated its target to achieve 20% or greater ROIC by 2020. ROIC is anticipated to improve to 16% in 2018. ROIC expansion values operational improvement and significant improvements made to Terex’s capital structure.

 

 

Terex’s AWP segment will gain from strong global markets, operational execution and innovative new products. The segment is in the early point of the growth cycle, both in North America and Western Europe. China and other developing markets are still in the early phase of adopting products. Macroeconomic fundamentals and customers feedback all hint toward a multi-year growth period for the segment.

 

With strong markets and a significantly higher backlog than last year, the MP segment is well poised for 2018. Further, rising global demand for crushing and screening equipment spurred by economic growth, construction activity and aggregate consumption bodes well. Its Fuchs material handlers and broad line of environmental products continue to grow in global markets which are likely to drive the segment’s growth.

 

 

Terex’s Cranes segment will grow on fairly stable global cranes markets, with growth anticipated in the near future. Currently, oil prices are stimulating modest demand increases in North America and the Middle East. Sales of Demag all-terrain cranes continue to improve on a global basis aided by successful new product introductions. The tower cranes business continues to grow on the back of higher demand in Europe, North America and Asia. The segment also continues to roll out new products.

 

However, the segment witnessed supply-chain challenges in mobile crane operations during the first half of 2018. Its results were negatively impacted by disruption in mobile cranes factory, caused by material shortages. Though the segment is expected to return to profitability in the fourth quarter, it will suffer an operating loss for the full year. The company guides the segment’s operating loss between 1% and 1.5% for fiscal 2018.

 

 

Terex’s margin outlook is tempered by pricing and steel cost headwinds. The market prices and the futures prices for steel increased significantly since the first quarter due to imposition of tariffs on certain steel imports. Another significant headwind is the implementation of new tariffs on certain Chinese imports beginning in early July 2018. This could result in significant price increases in materials and components. Inability of the company to pass on the increase by implementing price hikes might not always be feasible given the competitive environment. This is likely to dent its margins.

 

 

 

Terex has underperformed its industry with respect to price performance over the past month. The stock has gained around 2%, while the industry recorded growth of 22%.

 

 

Terex carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the same space include W.W. Grainger, Inc. (GWW Quick QuoteGWW - Free Report) , Lawson Products, Inc. and Atkore International Group Inc. (ATKR Quick QuoteATKR - Free Report) . All the three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

 

Grainger has a long-term earnings growth rate of 12.5%. Its shares have appreciated 125%, over the past year.

 

Lawson Products has a long-term earnings growth rate of 17.5%. The company’s shares have gained 39% in a year’s time.

 

Atkore International has a long-term earnings growth rate of 10%. The stock has rallied 78% in a year’s time.

 

 

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