Terex (TEX) Stock Declines 35% YTD: Will It Bounce Back?
Shares of Terex Corporation TEX have slumped 45% year to date compared with the industry’s decline of 24%. The decline can be attributed to headwinds plaguing the company.
What’s Pulling the Stock Down?
The company’s Cranes segment (which contributed 24% to the company’s revenues) 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, owing to material shortages. Even though the company addressed supply chain challenges in the third quarter of 2018, the results were not as expected.
Terex anticipates the Cranes segment to break-even or generate a small profit in the fourth quarter owing to the abovementioned headwind and raw material inflation. However, it will suffer an operating loss margin of 2.3% for the full year, down from the previous expectation of operating loss margin of between 1% and 1.5% for fiscal 2018. The company guides sales growth of 11% for fiscal 2018, lower than its previous expectation of growth of 13%. Moreover, the company updated production plans for the segment owing to the abovementioned supply chain challenges.
Terex anticipates fiscal 2018 sales to be up 17% to $5.1 billion (down from the prior projection of 18%). Additionally, the company anticipates operating margin at around 6.6% in 2018, a tad lower than the prior guidance of 7%. The company lowered adjusted earnings per share guidance for 2018 to $2.60-$2.70 from the previous guidance of $2.80-$3.00 owing to lower-than-expected third-quarter results. Further, higher input costs, including tariffs, and foreign exchange headwinds resulted in the trimmed guidance.
The company’s margin outlook has been lately tempered by pricing and steel cost headwinds. The market prices and futures prices for steel increased significantly since the first quarter due to the imposition on certain steel imports. Inability of the company to pass on the increase by implementing price hikes owing to the competitive environment adds to concern. This is likely to dent its margins.
The negativity around the stock can be gauged from the Zacks Consensus Estimate being revised downward by 32% in the past 60 days for current-quarter earnings. Over the same time period, the Zacks Consensus Estimate for fiscal 2018 and fiscal 2019 has been revised downward by 9% and 6%, respectively. Terex’s Zacks Rank #4 (Sell) only reaffirms that it is plagued with several headwinds at the moment. The unfavorable rank implies that investors should get rid of the stock from their respective portfolios. In fact, stocks with a Zacks Rank #4 or 5 (Strong Sell) are likely to underperform the broader market over the next one to three months.
Will the Stock Rebound?
Terex’s Aerial Work Platforms segment will gain from strong global markets, operational execution and innovative new products. The segment is in the early point of the growth cycle, both in North America and Western Europe. China and other developing markets are still in the early phase of adopting products. Macroeconomic fundamentals and customers feedback all hint toward a multi-year growth period for the segment. The company expects that its AWP segment will achieve an operating margin of between 10.5% and 11.0% in 2018, and net sales growth of 22%.
With strong markets and a significantly higher backlog than last year, the Material Processing segment is well positioned for 2018. Further, rising global demand for crushing and screening equipment spurred by economic growth, construction activity and aggregate consumption bodes well. Its Fuchs material handlers and broad line of environmental products continue to grow in global markets which are likely drive the segment’s growth. Operating margin at the MP segment is projected at 12.5% for 2018 while sales growth will be around 16%.
Further, Terex’s backlog has been growing year over year in every segment for seven quarters in a row. An improving backlog, along with an enhanced global market & environment positions the company well for the future.
We believe these factors will benefit Terex’s results going forward, and lift its share price. However, the stock will remain under pressure due to the abovementioned headwinds for the time being.
Stocks to Consider
Some better-ranked stocks in the same sector are DMC Global Inc. BOOM, CECO Environmental Corp. CECE and Northwest Pipe Company NWPX. While DMC Global sports a Zacks Rank #1 (Strong Buy), CECO Environmental and Northwest Pipe carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
DMC Global has a long-term earnings growth rate of 20%. Its shares have increased 39% year to date.
CECO has a long-term earnings growth rate of 15%. The company’s shares have surged 38% year to date.
Northwest Pipe has a long-term earnings growth rate of 10%. Its shares have gained 19% so far this year.
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