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Terex Strong on Growth Initiatives Amid Weak Industrial Demand

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On Mar 5, 2020, we issued an updated research report on Terex Corporation (TEX - Free Report) . The company is progressing well on its strategic transformation plan, and ongoing initiatives in Aerial Work Platforms (AWP) and Materials Processing (MP) segments. Its focus on introducing innovative products and adding to manufacturing capabilities will also fuel growth. However, the overall slowdown in industrial equipment demand and the impact of the coronavirus outbreak remains a headwind.

Weak Q4 Performance

Terex reported adjusted earnings per share of 36 cents in fourth-quarter 2019, reflecting a decline of 55% from the prior-year quarter. This highlights the ongoing challenging global market conditions for industrial equipment. Revenues in the quarter declined 16% year over year to $885 million.

Weak Industrial Demand, Coronavirus to Impact 2020 Results

The coronavirus outbreak has dealt a severe blow to the U.S manufacturing sector, which was already reeling under the U.S.-China trade tensions and waning global demand. Weakening global economic conditions and the impact of the coronavirus outbreak are weighing on consumer confidence. Customers have taken a conservative stance to manage their businesses by aggressively destocking inventory and holding back on new product launches. This slowdown in customer orders remains a major headwind. The company also stands the risk of supply chain disruptions thanks to the spread of the coronavirus.

For the Aerial Work Platform segment, there has been a downward trend in net bookings since fourth-quarter 2018. Terex anticipates the segment’s sales to be down 7-10% in 2020 from the prior year. Demand in the major markets for Aerial Work Platforms segment has declined, putting pressure on sales. Consequently, Terex is cutting down production and managing inventory levels to align with demand. Moreover, lower volume, adverse foreign exchange rates and product mix will weigh on margins for the year.  The company projects lower sales and earnings from the AWP China facility in the first half of the year thanks to the coronavirus outbreak.

The Material Processing (MP) segment’s sales in 2020 are now expected to be down 8-11% from the prior year. Global market uncertainty is weighing on the segment. Cautious customer sentiment is leading to delayed capital purchases of crushing and screening products, material handlers, and environmental equipment.

Terex projects earnings per share of $1.85-$2.35 for fiscal 2020 on net sales of approximately $3.9 billion. The sales guidance projects a decline of 6.3-7.3% from the prior year, while earnings are anticipated to decline 35%.

The Zacks Consensus Estimate for fiscal 2020 earnings is at $1.99, suggesting decline of 39% from the prior year. The estimate has gone down 11% over the past 30 days.

Strategic Initiatives to Reap Benefits

Despite the near-term headwinds, Terex’s AWP segment will gain from strategic source and savings, operational execution, strengthening global footprint and innovative new products in the long haul. The utilities business will gain from the new manufacturing facility being built in Watertown, SD, which will increase capacity and significantly improve productivity. The utility equipment market has significant potential in North America and developing markets.

In the MP segment, the company continues to invest in India to capitalize on the country and the surrounding markets’ prospects. Its strong product pipeline and consistent strong execution also positions the segment well for growth.

Execute to Win strategy: A Key Catalyst

Terex has made considerable progress in its strategic transformation plan that has three principal elements – Focus, Simplify and Execute to Win. While the Focus element calls for increased investments on high performing businesses, the Simplify aspect focuses on complexity reduction and cost management. The Execute to Win is focused on three key management processes — talent development, strategy development and deployment, and operational excellence. In sync with this, Terex sold the Demag mobile crane business and exited the mobile crane product lines manufactured at Oklahoma City facility, to improve operating performance.

Driving parts and service growth is one key element of its Execute to Win initiative. To deliver industry-leading customer service, the company is providing distribution partners easy-to-use digital tools that help them to service their customers more efficiently. This maximizes their opportunity to win business. This will provide Terex a competitive edge and accelerate parts growth.

Healthy Balance Sheet Bodes Well    

Terex’s net debt to adjusted EBITDA remains a healthy 1.6x as of Dec 31, 2019. This along with a healthy cash flow enables Terex to invest in future growth and creating additional value for shareholders. The company continues to invest in innovative products, the most recent introductions being the Terex Ecotec Shredder and Terex Advance mixer truck. In addition to expanding product offerings, the company is also investing in adding to its manufacturing capabilities to ensure future growth.

It has brought online new manufacturing capabilities, including Campsie facility in Northern Ireland and expanded the Hosur, India facility. This will enable the company to cater to global demand. Its new utilities facility will consolidate multiple production buildings into one state-of-the-art, world-class manufacturing and engineering facility. The Changzhou, China facility, which will undergo an expansion in 2020 to accommodate the market growth in China for aerial products, will be another growth driver.

Price Performance

Over the past year, shares of Terex have decreased 41.7% compared with the industry’s decline of 5.9%.

Zacks Rank & Stocks to Consider

Terex currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Industrial Products sector include Tennat Company (TNC - Free Report) , Graco Inc. (GGG - Free Report) and Sharps Compliance Corp . All of these stocks sport a Zacks Rank #1 (Strong Buy), at present. You can see the complete list of today's Zacks #1 Rank stocks here.

Tennant Company has an expected earnings growth rate of 40.7% for the current year. The stock has appreciated 18% over the past year.

Graco has a projected earnings growth rate of 4.3% for 2020. The company’s shares have rallied 6% over the past year.

Sharps Compliance has an estimated earnings growth rate of 767% for the ongoing year. In a year’s time, the company’s shares have gained 65%.

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