The crane segment was also the only business for Terex beside AWP to report a higher gross margin year over year in the last quarter, thanks to better pricing and cost cutting. To tackle economic challenges, Terex is aggressively reducing costs through moves like selling off poor-return businesses such as road-building products in Brazil and construction equipment business units in Germany. In fact, Terex has been realigning operations across segments for a long time, the effects of which are reflected in its expanding gross margin. The chart below shows the percent change in Terex’s quarterly gross margin vis-à-vis peers over the past three years.
Terex is the only company to have expanded its gross margin since 2010. While Manitowoc Company, Inc. (NYSE:MTW)’s margin has remained relatively flat, both Caterpillar and Deere have seen their respective gross margins shrink by 7% each. Caterpillar can blame the sluggishness in the mining industry, which is responsible for 41% of its revenue, while Deere & Company (NYSE:DE) has had to put up with headwinds like the severe drought that ravaged the U.S. last year. Deere gets 80% of revenue from farm equipment and the rest comes from the construction market. Though Terex’s gross margin at 19% isn’t the best in the industry, the growth, as evidenced by the chart above, is hard to ignore.
Apart from margin expansion, Terex Corporation (NYSE:TEX) is also strengthening its balance sheet. The company’s long-term debt soared to $2.2 billion when it acquired Demag cranes in late 2011. Terex has pared down the figure by nearly 10% since then. At the same time, Terex’s annual net income has more than doubled since the acquisition. More importantly, Terex generated $344 million in free cash flow last year, thrice the amount of net profit it earned. Few companies do that.
Strong cash flow, coupled with the recent drop in price, means Terex’s stock is currently trading at a strikingly low price to cash flow ratio of 6.9, which is also the lowest among peers. While Caterpillar is a close second with a P/CF ratio of 8.6, Deere & Company (NYSE:DE) looks expensive at a P/CF of 21. Manitowoc and Oshkosh are both trading at around 12 times cash flow.
I don’t think prudent investors should read much into Terex’s earnings downgrade. The company’s long-term story remains intact, and I like its management’s focused approach on making the company leaner and better. At current prices, Terex looks like a good bargain.
The article Is It About Time to Buy This Beaten-Down Stock? originally appeared on Fool.com and is written by Neha Chamaria.
Fool contributor Neha Chamaria has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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