On Jan 2, 2020, we issued an updated research report on Terex Corporation TEX. The company is progressing well on its Execute to Win strategy and ongoing initiatives in Aerial Work Platforms (AWP) and Materials Processing (MP) segments. Its disciplined capital-allocation strategy will also fuel growth. However, the overall slowdown in industrial equipment demand remains a headwind.
Muted Guidance for 2019 and 2020
Considering the overall slowdown in industrial equipment demand and impact of adverse foreign exchange rates, Terex projects earnings per share of $3.00-$3.20 for fiscal 2019 on net sales of approximately $4.4 billion. The company anticipates sales to be down 2-4% compared with the prior expectation of 1-3%. For 2020, Terex anticipates sales to be down 10% year over year.
There has been a downward trend in net bookings in the Aerial Work Platform segment since fourth-quarter 2018. For the segment, Terex anticipates the segment’s sales to be down 6-7% in fiscal 2019. Demand in the major markets for Aerial Work Platforms (AWP) has declined, putting sales under pressure. Terex is thus cutting down production and managing inventory levels to align with demand, which will impact margins. Moreover, lower volume, adverse foreign exchange rates and product mix will weigh on margins for the year.
Global market uncertainty is weighing on the Material Processing segment. Sales in fiscal 2019 are expected to be up 3-5% and operating margin is anticipated at 14-14.5%. There has been a dip in net bookings for the segment lately, pointing to weaker demand in their global markets.
The Zacks Consensus Estimate for fiscal 2019 earnings is at $3.08, suggesting growth of 13.7% from the prior year. The same for fiscal 2020 is at $2.26, indicating a year-over-year decline of 26.6%.
Ongoing Initiatives to Yield Results
Despite the headwinds mentioned above, 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 segment continues to improve sales in the Asia Pacific region and China, fueled by increasing product adoption. 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. The company has also simplified key elements of infrastructure, including implementing a new global performance management system, consolidating to a single chart of accounts and up-grading primary ERP system.
Healthy Balance Sheet Bodes Well
Terex continues to follow a disciplined capital allocation strategy while investing in future growth and creating additional value for shareholders. The company has $200 million remaining on its share buyback authorization. The company is making strategic investments in high performing businesses. It anticipates capital expenditure of $120 million and $100 million in 2019 and 2020, respectively. Net debt has gone down to $700 million as of Sep 30, 2019 from $847 million as of $847 million as of Dec 31, 2018. Terex’s net debt to adjusted EBITDA remains a healthy 1.5x as of Sep 30, 2019, down from 2.0x as of Jun 30, 2019.
Over the past three months, shares of Terex have gained 23.3%, outperforming the industry’s growth of 22.3%.
Zacks Rank & Stocks to Consider
Terex currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the Industrial Products sector are CIRCOR International, Inc. CIR, Berry Global Group, Inc. BERY and Northwest Pipe Company NWPX. 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.
CIRCOR International has an expected earnings growth rate of 59.3% for fiscal 2020. The stock has appreciated 29% over the past three months.
Berry Global has a projected earnings growth rate of 19.3% for fiscal 2020. The company’s shares have rallied 25% over the past three months.
Northwest Pipe has an estimated earnings growth rate of 23.1% for fiscal 2020. Over the past three months, the company’s shares have gained 20%.
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