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Terex (TEX) Rides on Improving Demand Amid High Input Costs

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On Mar 2, we issued an updated research report on Terex Corporation TEX. The company is poised to grow on investment in innovative products, digital innovation and expansion of manufacturing facilities. Recent pickup in customer demand and strong backlog levels also bode well. However, higher input costs will impede margins in the near term.

Execute, Innovate, Grow: A Key Catalyst

Terex has made significant progress in its Focus, Simplify and Execute to Win strategy over the 2016-2019 timeframe. In sync with the Focus element that calls for increased investments on high performing businesses, the company completed the sale of the Demag Mobile Cranes business and certain US Crane product lines. Further, Terex has transformed into a structurally simpler company that is committed to becoming more process-driven in order to achieve operational excellence.

With the Focus and Simplify elements of this strategy been met, it is making advancing toward the process improvement objectives associated with Execute to Win. Terex is now committed to its next phase of “Execute, Innovate, Grow.” Per the “Execute” theme, the company continues the progress made with “Execute to Win” by intensifying process discipline and implementing several new operational processes, among other initiatives. The “Innovate” theme seeks to continuously develop its product offerings and applying technology. The “Grow” aspect focuses on increasing inorganic investment and adding scope thorough acquisitions. This strategy will drive growth in the years to come.

Improving Order Levels Augur Well

The company noted improvement in customer demand and backlog levels in fourth-quarter 2020. Total backlog was up 25% year over year and 76% sequentially to $1,349 million in fourth-quarter 2020 on account of higher orders across both its business segments. Backed by expected benefits from Terex’s cost actions and improving customer demand witnessed particularly in fourth-quarter 2020, the company anticipates sales in 2021 to be approximately $3.45 billion. The figure indicates year-over-year growth of 12%. Earnings per share is expected in the range of $1.95 to $2.35 for the ongoing year, which suggests a substantial improvement from earnings of 13 cents reported in 2020.

Segments Poised for Growth

Terex’s Aerial Work Platforms segment will gain from strategic source and savings, right-sizing cost structure to align with customer demand, operational execution, strengthening global footprint and innovative new products in the long haul. The utilities business will benefit from the new manufacturing facility being built in Watertown, SD, which will increase capacity and significantly improve productivity.

In the Material Processing segment, strong product pipeline, expansion into new geographies, delivering innovative, new products and consistent strong execution position the segment well for future growth.

Healthy Balance Sheet Bodes Well

Terex is focused on maintaining a strong liquidity and cash position, positioning it well to navigate through the ongoing unprecedented crisis. As of 2020 end, the company had $670 million of cash and over $1.1 billion of total available liquidity. Terex expects free cash flow of around $100 million in 2021. The company’s board of directors has reinstated its quarterly dividend for 2021. Its total debt-to-total capital ratio was at 0.56 as of Dec 31, 2020, lower than the industry’s 0.71.

However, there are a few factors that are likely to impede growth.

While material input costs were generally stable in 2020, steel prices increased considerably beginning in fourth-quarter 2020. This is likely to continue in 2021 and lead to higher input costs and dent margins. Further, Section 301 tariffs on certain Chinese origin goods continue to put pressure on input costs. Moreover, volatile global economic conditions and the uncertainty regarding the impact of the pandemic, and resurgence of cases are weighing on the company’s customers.

Price Performance

Over the past year, shares of Terex have appreciated 102.1%, compared with the industry’s rally of 69.9%.

Zacks Rank & Stocks to Consider

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

Some better-ranked stocks in the Industrial Products sector are Deere & Company DE, AGCO Corporation AGCO and Avery Dennison Corporation AVY. While Deere flaunts a Zacks Rank of 1 (Strong Buy), AGCO Corporation and Avery Dennison carry a Zacks Rank #2 (Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Deere & Company has a projected earnings growth rate of 38.8% for fiscal 2021. Over the past year, the company’s shares have appreciated 119.2%.

AGCO Corporation has an estimated earnings growth rate of 42.7% for the ongoing year. The company’s shares have surged 107.4% in the past year.

Avery Dennison has an expected earnings growth rate of 13.7% for 2021. The stock has rallied 48% in a year’s time.

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Terex Corporation (TEX) : Free Stock Analysis Report

Deere & Company (DE) : Free Stock Analysis Report

AGCO Corporation (AGCO) : Free Stock Analysis Report

Avery Dennison Corporation (AVY) : Free Stock Analysis Report

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