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Terex's Corp.'s Transformation
At the mid-point of 2008, machinery company Terex Corp. (TEX) achieved record sales and share earnings of $10.1 billion and $7.13, respectively, on a trailing 12-month basis. After the 2001 recession, the Aerial Work Platforms, Construction, Cranes, Materials Processing, and Mining divisions all benefited from a recovering global economy and a resurgence of equipment demand. But then, in the back half of 2008, prompted by a collapse of the financial markets, a new, more-severe recession emerged, and orders, backlog, sales, and earnings embarked on a decidedly negative track.
In 2009, full-year sales dropped to around $5.2 billion and the bottom line came in at a loss of $4.05. Adjusting for the recent divestiture of its mining operations, Terex reported 2009 sales and share losses of $4.04 billion and $4.22, respectively. Throughout the year, management took action to improve operating processes, consolidate production, contain working capital, and boost overall liquidity.
Near the end of 2009, considering the prospect of a gradual, multiyear rebound in the macroeconomy, CEO Ron DeFeo and his team announced a major change in the company’s strategy. The aim was to move away from the traditional construction and mining markets and focus more on machinery and industrial products segments that offer higher potential returns on investment.
One of the first steps in the long-term strategic plan was the sale of the company’s mining operations to Bucyrus International (BUCY) for $1.0 billion in cash and $300 million of common stock. The sale was completed on February 19, 2010. Another early step was the July 2009 purchases of the Italy-based port equipment businesses of Fantuzzi Industries and Noell Crane for 155 million euros.
At this time, Terex has about $2.15 billion in liquidity available to execute its new business strategy. Excluding any acquisitions, management has set goals of doubling sales to $8.5 billion, lifting the operating margin (after depreciation & amortization) to 12%, and improving share net to $6.00. We believe that the company will come fairly close to meeting these objectives.
Some on Wall Street, citing favorable long-term prospects for infrastructure development and equipment demand, especially in emerging markets, have criticized the mining business divestiture. Still, one analyst has speculated that more asset sales, those of earth-moving and crane assets, might take place, posturing the company for an outright takeover. Terex will not comment on such speculation, but we would not be surprised to see the board of directors entertain an attractive offer; there are a number of possible, well-heeled suitors, such as Caterpillar (CAT), Komatsu, and Doosan.
Potential buyout bids, aside, Mr. DeFeo is pursuing acquisitions of companies with a leadership position in their particular market niche and the potential to earn a 20% return on investment inside a two-year period. He believes that Terex can attain an overall ROI of 20% or better within the next 3 to 5 years.
Lately, given the change in strategy and takeover speculation, Terex’s share price has shown marked volatility. At any rate, in our view, investors stand to gain from a possible buyout, which would probably provide a decent premium, or share-price advances over the pull to 2013-2015, when a cyclical upswing is likely to occur in the machinery industry.