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Terex (TEX) to Gain from Strong Backlog, Steel Tariffs a Woe

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On Mar 5, we issued an updated research report on Terex Corporation TEX. The company is anticipated to benefit from its focus on strategic priorities, product development, disciplined capital allocation strategy, strong backlog and cost-saving initiatives. However, the recent imposition of tariffs on steel imports is likely to lead to raw material inflation for the equipment manufacturer catering to the construction, infrastructure, and surface mining industries.


Improving Backlog Signals Upbeat Performance in 2018


Terex’s fourth-quarter 2017 adjusted earnings soared a whopping 230% year over year to 33 cents per share. Increased operating margins, bookings and backlog in every segment led to the overall improved performance in the quarter. For the fourth quarter in a row, Terex’s backlog grew year over year in every segment. Its total segment backlog grew 56% at 2017 end. This along with an improving global market environment positions the company well for 2018.


Terex anticipates net sales to be up around 10% year over year in 2018. For the year, EBITDA is projected to lie between $385 million and $415 million, approximately 40-50% higher than 2017, driven by strong operational performance. Effective tax rate in 2018 will be approximately 23%, an improvement of about 400 basis points (bps), of which 300 bps relate to the new U.S. reform.


The company projects 2018 earnings per share of between $2.35 and $2.65. The mid-point of the guidance reflects year-over-year growth of 85%. From a quarterly perspective, the company expects a normal historical sales pattern and earnings per share to be generated roughly 15% in first quarter, 35% in second, 30% in third and 20% in fourth.


Northward Estimates Reflect Optimism


The Zacks Consensus Estimate for both fiscal 2018 and 2019 has undergone positive revisions following the strong results. The Zacks Consensus Estimate for fiscal 2018 has gone up by 10% while the same for fiscal 2019 has moved up 7%.


The Zacks Consensus Estimate for earnings is currently pegged at $2.52 for fiscal 2018 which reflects year-over-year growth of 87%. For fiscal 2019, the Zacks Consensus Estimate for earnings is pegged at $3.21, year-over-year growth of 28%.


Terex has a long-term expected earnings per share growth of 16%.


Rising Cost Headwinds, Steel Tariffs a Woe  


Terex’s margin outlook is tempered by pricing and steel cost headwinds. If steel prices continue to rise from current levels, then the company apprehends that 2018 earnings will come in near the lower end of its guidance range. Terex has underperformed its industry with respect to price performance in a year’s time. The stock has gained around 49%, while the industry has recorded growth of 16%.



Segments Poised for Growth


Terex expects to increase revenues and operating margins in every business segment while continuing to implement the Simplify and Execute to Win elements of its strategy. Further, it intends to follow disciplined capital allocation strategy. In the Aerial Work Platforms segment, sales are projected to increase approximately 10% while operating margins will be between 9.5% and 10.5%. Improved markets, modest increase in pricing and continued escalation in manufacturing productivity is likely to drive results.


The Cranes segment delivered the third consecutive quarter of positive operating profit. The global crane markets have stabilized and the company is witnessing pockets of growth, improving order rates and backlog. Terex plans to improve productivity on higher volumes and better operational execution, adding to benefits from the restructuring actions taken in 2017. It will continue to make significant year-over-year improvement with revenues and operating profit increasing 12% and 2%, respectively, in 2018.


The Materials processing segment will continue its robust performance with sales up 8% operating margins between 11.5% and 12.5% aided by higher backlog and strength in its markets. Stronger demand for fluids material handlers and broad line of environmental products will also drive results. The Materials processing segment is investing in innovations and will continue to launch new products and services that improve customers' return-on-investments in 2018.


Simplifying Structure to Fuel Growth


The sales of the Material Handling & Port Solutions (“MHPS”) segment and the remaining construction businesses concluded the Focus element of the company’s strategy and created substantial value for shareholders. Terex continues to simplify its structure by footprint rationalization plan, exiting 12 manufacturing locations totaling 2.6 million square feet. The company also cut down administrative expenses while maintaining focus on increasing investment in innovation, strategic sourcing, and commercial excellence.


Focus on Disciplined Capital Allocation


Terex plans to follow its disciplined capital allocation strategy in 2018. The company projects to nearly double its free cash flow to approximately $100 million. Terex anticipates its gross financial leverage to go down to approximately 2.5 times at year-end. The company reiterated target to achieve 20% or greater ROIC by 2020. In 2017, ROIC was at 8% and is expected to improve to 15% in 2018. ROIC expansion values both operational improvement and significant improvements made to Terex’s capital structure.


Terex carries a Zacks Rank #3 (Hold). 


Stocks to Consider


Some better-ranked stocks in the same sector include Mobile Mini, Inc. MINI, Capstone Turbine Corporation CPST and Xylem Inc. XYL. While Mobile Mini sports a Zacks Rank #1 (Strong Buy), Capstone Turbine and Xylem carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.


Mobile Mini has a long-term earnings growth rate of 14%. The company’s shares have rallied 47% during the past year.


Capstone Turbine has an expected long-term earnings growth rate of 25%. Its shares have surged 89% in a year’s time.


Xylem has an expected long-term earnings growth rate of 18%. The company’s shares have gained 52% over the past year.


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