Slowdown in the global economy has hit the construction equipment industry hard, leaving investors in the lurch. Industry leader Caterpillar Inc. (NYSE:CAT) is among the worst-performing Dow stocks this year, down 11% year to date.
Amid the gloom, one equipment maker that was surprisingly keeping its head above water was Terex Corporation (NYSE:TEX). While Caterpillar bled, Terex’s stock hit a 52-week high in May. As of June 3, Terex’s stock was returning a handsome 20% year to date. Then the inevitable happened.
In three weeks flat, Terex gave up all those gains, and more. The stock plunged, and is down 10% year to date, as of this writing. Has Terex then become too risky for investors, or is the fear overdone?
Why did it tank?
While global weakness was a factor, the bloodbath in Terex Corporation (NYSE:TEX)’s stock was triggered when the company lowered its full-year earnings guidance to a range of $1.90-$2.10 per share, down 20% from its former projection. Terex cited weakness in two of its divisions – construction, and material and port handling solutions, as the reason. The two businesses, which accounted for nearly 42% of Terex’s total sales last year, were the major drag on the company’s performance last quarter. Blame the deepening crisis in Europe.
The Euroconstruct research group projects the European construction market to shrink by 3% this year. Worse yet, it expects the market to grow by just 0.5% and 1.7% in 2014 and 2015, respectively. With Europe contributing more than 30% to Terex Corporation (NYSE:TEX)’s top line, investors have a reason to worry. But, only for the short term, because Terex’s main business is going strong, and the company is strengthening key areas which should help build a solid foundation for the future.
A quarter of Terex Corporation (NYSE:TEX)’s revenue comes from its aerial works platforms division, or AWP. Even as Terex’s other businesses struggled, AWP reported a solid 21% jump in revenue year over year in the last quarter. As a result, the unit’s share in the top line climbed to 30% during the quarter. Moreover, AWP was the only division to report a double-digit growth in backlog (value of firm orders that will most likely convert into revenue within one year) last quarter.
AWP equipment, which includes booms, lifts, telehandlers, and trailers, is primarily used in residential and commercial construction, setting the stage for Terex Corporation (NYSE:TEX) to take advantage of the ongoing recovery in the U.S. housing market. What’s fueling sales further is robust replacement demand, primarily from rental companies.
In fact, most of the equipment makers today are banking on the customers’ needs to replace aging fleet. In its last earnings call, Caterpillar Inc. (NYSE:CAT)’s management even went to say that most of what the company sells is “through replacements.” Another equipment maker, Oshkosh Corporation (NYSE:OSK), recently upgraded its full-year, earnings-per-share guidance despite struggling to keep its primary defense equipment business afloat in the wake of U.S. budget cuts. The upgrade, which even at the lower end translates into a solid 28% jump from 2012 earnings of $2.27 per share, was almost entirely on the back of strong replacement demand for AWP equipment. Oshkosh Corporation (NYSE:OSK) derived 41% of its revenue from the access equipment business in the last quarter.
In short, the AWP business could help Terex Corporation (NYSE:TEX) offset some of the weakness in other divisions. Moreover, Terex could also get support from its cranes unit which contributed 27% to its revenue in the last quarter. Peer Manitowoc Company, Inc. (NYSE:MTW), which gets 60% sales from cranes, expects revenue from the business to grow by “high single-digit percentage” this year.