This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, our headlines feature new buy ratings from Morgan Stanley on heavy equipment manufacturers Terex Corporation (NYSE:TEX) and AGCO Corporation (NYSE:AGCO) — but not for Deere & Company (NYSE:DE). Let’s dig in and find out why not.
Terex Corporation (NYSE:TEX) is tops
Morgan Stanley named Terex Corporation (NYSE:TEX) its top pick in the machinery sector this morning, assigning the stock an overweight recommendation, and a $47 price target. According to StreetInsider.com, Morgan Stanley is labeling Terex Corporation (NYSE:TEX) a “self help” story, capable of growing sales and profits even if the non-residential construction industry should sputter.
I don’t necessarily disagree. With a business balanced pretty evenly among aerial work platforms, materials handling and processing, and construction and cranes, Terex Corporation (NYSE:TEX) is clearly focused on non-residential construction — and could well get punished if this sector sags further. That said, the company’s stock looks so cheap today that this risk may already be priced into it.
Valued at a market cap of $3.3 billion, Terex Corporation (NYSE:TEX) carries a sky high P/E ratio of 84 — but a much more modest price to free cash flow ratio of just 10.4. Analysts on average expect the company can grow its earnings in excess of 9% annually over the next five years. Assuming the right about that, the stock looks slightly overpriced to me, but not egregiously so. What’s more, given that the consensus forecast for the rest of the construction industry is 13% growth, it would appear that analysts are already erring on the side of caution in respect to Terex. Should the company grow at a rate approaching that of its peers, rather than the more modest 9% rate at which it’s expected to grow, Terex shares may even be undervalued.
Is AGCO Corporation (NYSE:AGCO) a go?
The analyst is nearly as optimistic about agricultural equipment maker AGCO Corporation (NYSE:AGCO), which it also rates overweight. And in fact, AGCO Corporation (NYSE:AGCO)’s prospects may be even brighter than those of Terex.
Priced at precisely 10 times its $556 million in trailing free cash flow, AGCO Corporation (NYSE:AGCO) looks cheaper than Terex when valued on FCF. In fact, AGCO Corporation (NYSE:AGCO) may appeal to individual investors even more. This is because the company’s P/E ratio — the first thing many investors look at when they began to investigate a prospective investment — is a much more appealing 10.7, and not nearly so frightening as the 84 P/E at Terex.