If you are still holding on to shares of Terex Corporation TEX in your portfolio, it is time you dump those as chances of favorable returns in the near term appear bleak. Terex has witnessed significant price decline over a year’s time owing to supply-chain challenges in mobile crane operations and higher input costs on account of the implementation of tariffs.
Similar to wise buying decisions, offloading certain underperformers at the right time helps maximize portfolio returns. Shares of this equipment manufacturer catering to the construction, infrastructure, and surface mining industries, have plunged approximately 43% in a year’s time, compared with the industry’s decline of 21%.
Let’s take a look at factors that are dragging the stock down.
Ongoing Issues at the Crane Segment
The company’s Cranes segment witnessed supply-chain challenges in mobile crane operations during the first three quarters of 2018. Notably, the segment’s operating results were negatively impacted by disruption in mobile cranes factory, caused by material shortages. Even though the company addressed supply chain challenges in the third quarter-2018, it was not as expected.
The company anticipates the Cranes segment to breakeven or generate a small profit in the fourth quarter on the back of the abovementioned headwind and raw material inflation. It will suffer an operating loss margin of 2.3% in fiscal 2018, down from the previous expectation of operating loss margin of between 1% and 1.5%. The company guides sales growth of 11% for fiscal 2018, lower than its previous expectation of growth of 13%.
Tariffs to Impede Margins
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 owing to the imposition on certain steel imports. This has led to significant price increases in materials and components. The company’s ability to pass on the increase by implementing price hikes might not always be feasible given the competitive environment. This is likely to dent margins.
Estimates Moving South
Negative earnings estimate revisions for the current quarter and the fiscal indicate bleak prospects for the company in near term. Notably, the fourth-quarter earnings estimates have plunged 32%. While the same for for fiscal 2018 and 2019 has gone down 9% and 6%, respectively, over the last 90 days. Further, the company’s Zacks Rank #4 (Sell) only reflects its innate weakness.
Further, the company’s stretched valuation is a concern. Terex's trailing 12-month EV/EBITDA ratio is 6.5, while the industry’s average trailing 12-month EV/EBITDA ratio is pegged lower at 6.4. This implies that the stock is overvalued.
Looking at the prevailing challenges and an unfavorable Zacks rank, it is wise to stay away from investing in Terex stock at the moment.
Some better-ranked stocks in the sector include Alarm.com Holdings, Inc. ALRM, Brady Corporation BRC and Zebra Technologies Corporation ZBRA. All these companies carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Alarm.com Holdings has surpassed estimates in the trailing four quarters, recording average positive earnings surprise 27.3%. Its shares have gained 38% in the past year.
Brady has surpassed estimates thrice in the trailing four quarters, recording average positive earnings surprise of 7.04%. Its shares have gone up 10% in a year’s time.
Zebra Technologies has outpaced estimates in the preceding four quarters, recording average earnings surprise of 13.79%. Its shares have gone up 54% in a year’s time.
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