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Terex Weakness Stokes Global Growth Fears
Global maker of construction equipment Terex Corporation (NYSE:TEX) lowered its earnings forecast for 2008 Thursday, sending shares down nearly 20% and causing market-topping losses for rivals Caterpillar (NYSE:CAT) and CNH Global (NYSE:CNH) on an downright brutal day on Wall Street. But is this a warning for the whole industry, or does Terex deserve to swim alone?
Terex now sees net earnings for 2008 to be between $6.35-6.65 per share, down from the $6.85-7.15 the company confirmed just over a month ago. The new estimates would represent 10-14% growth year-over-year. Terex is seeing further deterioration in Western Europe and the U.S., especially for its Aerial Work Platforms (AWP) and Construction segments.
A Closer Look Gives Signs
Thanks to barren credit markets and the continued lagging of residential housing, the commercial real estate and construction markets are quickly becoming dryer than desert dirt. The AWPs managed by Terex are often situated along large commercial building projects or used for building maintenance. This segment represents over 20% of Terex's revenue, and is also focused on the U.S. and Western Europe, which together account for over 80% of sales.
The AWPs along with Terex's third largest operating segment (Construction) both showed declining operating income during the second quarter, even though revenue was higher in both groups. Terex has been unable to pass higher input costs along to customers with the same speed as Caterpillar, which only had falling operating profits in one segment, accounting for only about 5% of total sales. (To learn more, read Analyzing Operating Margins.)
Even though both Caterpillar and Terex do more than 50% of business overseas, Caterpillar has a much more diversified market base. In the second quarter, Caterpillar grew sales by 50% in the Asia/Pacific region and 27% in Latin America, two areas vastly underserved by Terex. While Caterpillar now generates about 35% of sales from these two world regions, Terex stands below 25%.
Industry Forecast
With the dust now settled, Terex looks pretty cheap. Shares can be had for less than 0.5-times sales and 6-times the newly-lowered net earnings midpoint for 2008. This is cheaper than either Caterpillar (11-times 2008 forecast) or CNH (9-times estimates).
Caterpillar has completely bucked the cyclical trends that have defined its past, and still appears to be the most balanced and diversified company in the global arena. This diversification comes from not just geography, but a rapidly increasing service package that includes replacement parts, logistics, and rail services. (For more on this metamorphosis, read Caterpillar Transforming Before Our Eyes.)
Tread Lightly Through the Fall
I would not be surprised to see further warnings from the group over the next few months. Judging by Friday's employment report, the U.S. is not gaining any recession-beating momentum. The U.K. is seeing equal pain, with many economists predicting that the nation is currently in a recession. Also, with crude oil and most of the commodities dropping sharply the past few weeks, some valuable end-markets, like energy production and mining, could be slowing down their previously rapid appetites for equipment.
Keep in mind that construction and infrastructure equipment makers typically do poorly heading into recessions, but their stocks actually hold up well during them. Caterpillar, Terex, and John Deere (NYSE:DE) all outperformed the S&P 500 handily during our last recession in 2001-2002. Because they participate most at the leading edge of economic growth cycles, they see sales and earnings rebounds well before later-stage industries like consumer retail or technology.
Parting Thoughts
These companies should be handled carefully until third quarter earnings come out, and investor should expect continued volatility so long as commodity and oil markets remain shaky. However, the timing is setting up nicely to approach this cheap group that should continue to see excellent long-term trends globally. I for one think the infrastructure buildup is in the nascent stages of a multi-decade run in the BRIC nations and beyond.
Do you feel that now is the time to buy into construction stocks? Are the emerging economies being halted by falling commodities? Join me in the Investopedia Community (EpiphanyOne) to discuss your views and make your stock picks for all to see.
Terex now sees net earnings for 2008 to be between $6.35-6.65 per share, down from the $6.85-7.15 the company confirmed just over a month ago. The new estimates would represent 10-14% growth year-over-year. Terex is seeing further deterioration in Western Europe and the U.S., especially for its Aerial Work Platforms (AWP) and Construction segments.
A Closer Look Gives Signs
Thanks to barren credit markets and the continued lagging of residential housing, the commercial real estate and construction markets are quickly becoming dryer than desert dirt. The AWPs managed by Terex are often situated along large commercial building projects or used for building maintenance. This segment represents over 20% of Terex's revenue, and is also focused on the U.S. and Western Europe, which together account for over 80% of sales.
The AWPs along with Terex's third largest operating segment (Construction) both showed declining operating income during the second quarter, even though revenue was higher in both groups. Terex has been unable to pass higher input costs along to customers with the same speed as Caterpillar, which only had falling operating profits in one segment, accounting for only about 5% of total sales. (To learn more, read Analyzing Operating Margins.)
Even though both Caterpillar and Terex do more than 50% of business overseas, Caterpillar has a much more diversified market base. In the second quarter, Caterpillar grew sales by 50% in the Asia/Pacific region and 27% in Latin America, two areas vastly underserved by Terex. While Caterpillar now generates about 35% of sales from these two world regions, Terex stands below 25%.
With the dust now settled, Terex looks pretty cheap. Shares can be had for less than 0.5-times sales and 6-times the newly-lowered net earnings midpoint for 2008. This is cheaper than either Caterpillar (11-times 2008 forecast) or CNH (9-times estimates).
Caterpillar has completely bucked the cyclical trends that have defined its past, and still appears to be the most balanced and diversified company in the global arena. This diversification comes from not just geography, but a rapidly increasing service package that includes replacement parts, logistics, and rail services. (For more on this metamorphosis, read Caterpillar Transforming Before Our Eyes.)
Tread Lightly Through the Fall
I would not be surprised to see further warnings from the group over the next few months. Judging by Friday's employment report, the U.S. is not gaining any recession-beating momentum. The U.K. is seeing equal pain, with many economists predicting that the nation is currently in a recession. Also, with crude oil and most of the commodities dropping sharply the past few weeks, some valuable end-markets, like energy production and mining, could be slowing down their previously rapid appetites for equipment.
Keep in mind that construction and infrastructure equipment makers typically do poorly heading into recessions, but their stocks actually hold up well during them. Caterpillar, Terex, and John Deere (NYSE:DE) all outperformed the S&P 500 handily during our last recession in 2001-2002. Because they participate most at the leading edge of economic growth cycles, they see sales and earnings rebounds well before later-stage industries like consumer retail or technology.
Parting Thoughts
These companies should be handled carefully until third quarter earnings come out, and investor should expect continued volatility so long as commodity and oil markets remain shaky. However, the timing is setting up nicely to approach this cheap group that should continue to see excellent long-term trends globally. I for one think the infrastructure buildup is in the nascent stages of a multi-decade run in the BRIC nations and beyond.
Do you feel that now is the time to buy into construction stocks? Are the emerging economies being halted by falling commodities? Join me in the Investopedia Community (EpiphanyOne) to discuss your views and make your stock picks for all to see.
by
Ryan Barnes
Ryan Barnes has over 10 years experience in portfolio management and investment research, covering equities, fixed income and derivative products. Barnes has worked with Merrill Lynch, Charles Schwab, Morgan Stanley and many others as an institutional trader, and maintained AIMR compliant performance for a diverse set of high-net-worth investors.
Barnes is currently working as a writer and financial modeling consultant specializing in capital appreciation and hedging strategies, and is the editor of EpiphanyInvesting, a website devoted to finding long-term success in the stock market.
Barnes is currently working as a writer and financial modeling consultant specializing in capital appreciation and hedging strategies, and is the editor of EpiphanyInvesting, a website devoted to finding long-term success in the stock market.
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