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Pennant Capital Management Bought More Terex Corp

PENNANT CAPITAL MANAGEMENTIn a 13G filed with the SEC, Pennant Capital Management, managed by Alan Fournier, reported that as of July 27th the fund owned 9.3 million shares of Terex Corporation (NYSE:TEX). This gave Pennant ownership of 8.5% of the company’s shares outstanding. Terex provides capital goods; its products include lifts (including under the Genie brand), construction equipment, and cranes. At the end of March, Pennant had reported a position of 7.6 million shares, so the new report represents a significant increase in Pennant’s stake (find other stocks in Pennant Capital Management’s portfolio). Year to date Terex Corporation (NYSE:TEX) is up over 40%, though that gain came early in the year and the stock is actually down 5% since the beginning of February. This decline has come despite the company demolishing earnings expectations in the first two quarters of the year, beating them by over 30% in each case.

In the second quarter of 2012, for example, Terex Corporation increased its revenue 35% compared to the second quarter of 2011, and a marginal net loss became a net gain of $86 million. For the first half of the year, revenue increased 40% and net income increased from $11 million to $109 million. In addition, Terex generated positive cash flow from operations in the first half of 2012, which it failed to do in the first half of 2011. All five divisions of Terex Corporation reported increases in revenue and operating income. North American demand is currently strong, and combined with certain other geographies (Terex mentions Australia in particular) the business therefore seems to be doing fine for now while still at risk of future macro weakness (the stock has a beta of 3.4).

The rebound in Terex’s business is showing up in sell-side expectations. The company’s forward P/E is 8, half of its trailing P/E ratio of 16. Given the $2.3 billion market cap and earnings last quarter of $109 million, the company is trading at between five and six times annualized earnings from last quarter (though the second quarter does seem to have been unusually good, possibly party because of seasonal factors). In other words, the stock appears reasonably priced assuming low growth and Wall Street analysts expect continued high growth.

Other than Pennant’s investment, interest in Terex was fairly limited in the first quarter of 2012. Former entrepreneur Mohnish Pabrai has studied Warren Buffett’s investment philosophy and practices and now attempts to follow a similar style in the Pabrai Investment Fund, which owned 2.2 million shares in the company at the end of March (see more of Pabrai’s stock picks). Pabrai has initiated its position in Terex Corporation (NYSE:TEX) in the fourth quarter of 2011. Ron Gutfleish’s Elm Ridge Capital reported owning 1.1 million shares at the end of the first quarter after having sold off about half of the shares it had owned at the beginning of the year (see other investment activity at Elm Ridge Capital).

The closest peer for Terex is Caterpillar Inc. (NYSE:CAT). Caterpillar, possibly because of its greater size, is less sensitive to market movements and its beta is “only” 1.8. Caterpillar’s forward P/E ratio is 8, as with Terex, but this forward value comes off of much lower expected growth as the larger company’s trailing P/E is only 10. Furthermore, Terex’s recent earnings growth has actually been trumped by Caterpillar Inc. (NYSE:CAT), which in its last quarterly report announced earnings that were 67% above those it had reported in the previous year’s quarter. Finally, Caterpillar pays a dividend yield of 2.4% while Terex pays none at all. We would say that unless Terex is much better positioned to capture industry trends- and we do not think it is to that great a degree- Caterpillar is a better buy. Terex can also be compared to Deere & Company (NYSE:DE) and Illinois Tool Works (NYSE:ITW); these companies also produce capital machinery, though with a focus on agricultural and manufacturing customers, respectively. As such, they have lower betas than Caterpillar but carry slightly higher forward multiples than the construction oriented-companies- Deere’s is 9 and Illinois Tool Works (NYSE:ITW)’s is 11. Both companies are also coming off of double-digit earnings growth rate in their most recent quarter compared to the same period in 2011. The comparison between these two companies and Terex Corporation (NYSE:TEX) depends on the attractiveness of the customer profiles, and at this time between the three we would lean towards Deere & Company (NYSE:DE) based on what we see as growth opportunities in agriculture.

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