Profitability was a little soft, though. Reported gross margin rose more than three points but analysts expected more. Construction margins were less negative (and a little better than expected), but weak margins in material handling did some damage. Were it not for a low tax rate, Terex would not have beat the average of analyst estimates. (To know more about income statements, read Understanding The Income Statement.)
Construction – Where It’s Hot, Terex Is Not That’s great for Caterpillar and other global biggies like Komatsu (OTCBB:KMTUF), Liehberr, CNH (NYSE:CNH) and so on. It’s not so good for Terex at this point, as the company has relatively high exposure to North America and Europe, but not so much exposure to emerging markets. The extent to which Terex can quickly (and profitably) expand its presence will go a long way toward how much of the bull thesis works out. The good news is that the opportunity is there. Demand for aerial work platforms is picking up for Terex and rival Oshkosh (NYSE:OSK) in North America, but the unexploited potential in Asia and Latin America is even more considerable. With U.S. federal infrastructure spending likely to be compressed for at least a few more years, though, the sale of products like roadbuilding equipment will really rely on that overseas expansion. Demag a Good Deal I also wonder if Demag can, in the long run, expand the company’s overseas sales potential. Much of Demag’s business is in emerging markets, and though there isn’t immediate synergy from selling port cranes in China and then selling roadbuilding equipment through the same channels, it’s a foot in the door. The Bottom Line There are definitely signs out there that construction activity is ticking up in North America, albeit off a low base. If this recovery is real, Terex could see some significant operating leverage. The problem is that this company and stock are basically leveraged plays on that thesis – if construction picks up, Terex could be a very strong stock. But if construction stays where it is (and the company cannot expand its ex-U.S. business fast enough), the risk is that this becomes a dead money holding for a while longer. (For more, see Earning Forecasts: A Primer.) Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free! At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.
Although construction activity has been poor in the U.S. for going on five years and activity is slowing in Europe (especially Southern Europe), activity has been pretty robust in Latin America and developing Asia. Moreover, even developed markets like Japan and New Zealand are seeing equipment demand tied to disaster-related rebuilding efforts.
Terex definitely had to pay up for Demag (over $1 billion), but the money should be worth it in the long run. Right off the bat, the deal gives Terex exposure to niche markets like port cranes and industrial cranes – an area with relatively less competition and solid margin potential.
Although Terex sold its mining business to Bucyrus (now owned by CAT) more than two years ago, the company still has good exposure to mining through its trucks and materials processing units. The trick now is for Terex to build on the more global leverage of the mining and Demag ops and do a better job of selling construction and aerial work equipment to the global market.
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