Goldman Reinstates Terex At Buy, Sees 27% Upside

Goldman Sachs has reinstated Terex Corporation TEX at Buy with a price target of $27, implying an upside of 27 percent, as it sees "significant scope" for upside from restructuring.

"We are constructive on TEX's opportunities to (1) significantly reduce the manufacturing footprint in its Cranes business (30 percent of pro-forma sales), (2) reduce leverage if the proposed MHPS divestiture closes, and (3) explore strategic alternatives for the Construction equipment business," analyst Jerry Revich wrote in a note.

Buy, Buy, Buy

Revich, who added Terex to the "Americas Buy List," sees potential for at least 400 bps of margin improvement from restructuring in its cranes segment.

The analyst highlighted that the MHPS divestiture, if successful, would not only move the company to a net cash position, but could significantly improve Terex's balance sheet.

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Including demag's underfunded pension liability, Revich projects net proceeds of $1.5 billion for a business where the analyst estimates 2017 EBITDA of $85 million, or an 18x EV/EBITDA multiple, according to the report.

On the potential sale of construction business, Revich said, "We see the lack of distribution and product scope as structural issues, but believe the asset could supplement the footprint of other participants."

Lingering Concerns

Meanwhile, the analyst is concerned with North American aerial platform capex cycle following the peak in 2014; he sees medium term risk to net pricing. This is negative for Terex and Oshkosh Corp OSK's aerial platform margins in 4Q16–2017E as "the companies are positioned between rising steel input costs and deteriorating used equipment values and customer pricing."

Bottom Line

However, Revich said the stock's valuation is attractive if Terex can turn around the cranes segment.

"If Terex management is successful in driving a return in Cranes EBITDA margins to 10% at flat sales via cost reductions, we estimate the stock is trading at 5.5x EV/EBITDA (pro-forma for the proposed MHPS divestiture)," Revich added.

At time of writing, shares of Terex were up 0.45 percent to $21.32.