Thoughts: Terex Corporation



COMPANY PROFILE
“Terex Corporation is a diversified global manufacturer with 2006 net sales of $7.6 billion. Terex operates in five business segments: Terex Aerial Work Platforms, Terex Construction, Terex Cranes, Terex Materials Processing & Mining, and Terex Roadbuilding, Utility Products and Other. Terex manufactures a broad range of equipment for use in various industries, including the construction, infrastructure, quarrying, surface mining, shipping, transportation, refining and utility industries. Terex offers a complete line of financial products and services to assist in the acquisition of Terex equipment through Terex Financial Services. More information on Terex can be found at www.terex.com.”

WHY TEREX
CNBC recently conducted an interview with Ronald M. DeFeo, Terex’s CEO, that held my attention. During the interview, DeFeo mentioned that 70% of Terex’s business comes from overseas. Given the dollar’s depreciation, and the fact that emerging markets (Brazil, India, Russia, China, Middle East & Africa) are currently the world’s engine of growth, and will continue to be for decades to come, Terex’s focus on infrastructure seemed like a good place to begin my series on Company Profiles. Massive investments made by the governments of emerging economies make this sector particularly interesting. For example, despite the slight slowdown expected in India’s economy, government officials have increased their budget for infrastructure related projects.

THE GOOD
For the nine months ending September 30th, net income rose from $2.91/share to $4.20/share on a $900 million increase in net sales. Cash and cash equivalents grew by approximately $90 million USD. Four of the company’s five business units experienced growth. The units experiencing growth are Aerial Work Platforms, Construction, Cranes, and Materials Processing & Mining, with Materials Processing & Mining showing the strongest increase in net sales, with demand for these products outstripping the company’s ability to produce them. From the company’s recent 10Q, “Global crane and mining equipment demand continues to outpace our current ability to produce and supply product, leading to a large customer backlog.” The company continues to invest heavily in the emerging markets of Brazil, India, China, Russia, and the Middle East.

THE BAD
Although demand for the company’s products is outpacing production capacity, Terex faces risks from increased commodity costs. Increased commodity costs have driven up production related expenses while continued component shortages increase the backlog. Unless the company can pass commodity related expenses to backlogged customers, they risk per unit profit margin contractions. In addition, Terex’s Roadbuilding & Other faced a contraction due to a downturn in the North American residential construction markets. Continued weakness in the residential housing market should weaken this business unit even further.

OVERALL
Terex is a global infrastructure play. Growth in global markets offsets a slowdown in the United States, and the company benefits from dollar weakness. Expansion into emerging economies should continue to benefit the company for years to come. India’s increase in infrastructure related expenditures despite global economic weakness suggests that this segment may be sheltered from the downturn. Consumer weakness in the United States should have little impact on Terex’s internationally focused businesses. Increased commodity costs however may dampen the rate at which the company’s profits grow.

February 23, 2008 | Filed Under Company Profiles 

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