Balanced View on Terex - Analyst Blog

On May 21, 2014, we issued an updated research report on Terex Corp. TEX. This global equipment manufacturer is expected to benefit from internal cost initiatives, capital structure improvements and projected growth in net sales.

Notably, Terex will gain in 2014 from its substantive actions, undertaken to adjust the cost structure of the Material Handling & Port Solutions (MHPS) as well as Cranes and Construction segments. Increased orders for the Cranes segment has been driven by recovering orders in North America and improved conditions throughout Europe.

MHPS has also received strong bookings from China and Europe in the first quarter of 2014. Overall, an encouraging quarter with regard to bookings indicates solid revenue for the remainder of 2014.

The company also remains optimistic about the Aerial Work Platform AWP segment for the rest of the year, supported by an ongoing recovery in the North American construction market. The American Rental Association (ARA) forecasts that Equipment rental industry revenue would grow in double digits in 2014 and 2015 with strong demand and broad-based recovery. In addition, continued acceleration in fleet replacement will support the U.S. construction cycle along with benefiting the company.

For 2014, Terex expects its earnings per share guidance to be in the band of $2.50–$2.80. The company also maintained its sales guidance of $7.3–$7.7 billion for the full year. The profit step-up in the second quarter will be driven by seasonality, crane recovery, continued strength in aerials and lack of Conexpo expenses.

In addition, Terex completed the purchase of the remaining minority shares in Terex Material Handling & Port Solutions AG for $71 million during the first quarter of 2014, bringing its ownership to 100%. This will eliminate remaining payments associated with these shares and allow addressing structural cost promptly.

Despite these positives, Terex's expansion of manufacturing in lower-cost countries (like China and India) can increase exposure to political and monetary instability. Unfavorable changes in government regulation and relatively weaker enforcement of intellectual property rights would hurt the company's growth.

Additionally, the American Institute of Architects' AIA Architecture Billings Index (ABI) declined to 48.8 in Mar 2014, from 50.7 in February. Weak public construction spending remains the most significant risk to a non-residential recover. This makes expected recovery in the non-residential market seem uncertain. These factors will weigh on the results of the Construction and Cranes segments.

Moreover, pricing pressure, slower-than-anticipated construction recovery, adverse currency fluctuations, commodity price volatility and competition remain headwinds in the near term.

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

Key Picks from the Sector

Some better-ranked stocks worth considering at the moment include Caterpillar Inc. CAT, Komatsu Ltd. (KMTUY) and Belden Inc. BDC. All of these have a Zacks Rank #1 (Strong Buy).