Don't Get Mauled by Tyrannosaurus Terex

It's not safe to walk on Wall Street after dark, Fools. There in the shadows lurk some cunning assailants looking to pinch your hard-earned equity.

Undeterred by mounting headwinds, the spring rally of 2009 floats to heights that make the air grow thin. Even a seemingly endless supply of dilutive equity offerings by debt-laden shippers like DryShips (Nasdaq: DRYS  ) and functionally insolvent banks like Bank of America (NYSE: BAC  ) have failed to derail a run that I consider irrational exuberance of the highest order.

The $600 million capital fundraising effort announced by Terex (NYSE: TEX  ) last week presents the latest example of predation upon eager shareholders. Punch-drunk from a 75% surge in shares since the broader equity rally commenced in early March, Terex shareholders barely flinched while welcoming 11 million new shares to the marketplace (priced at $13, and representing about 25% of the financing package). Another $300 million in notes yielding 10.875%, and $150 million in 4% convertible notes round out the raw deal. It's not that I fault Terex for wanting to pay down some of the debt that weighed so heavily on shares before the rally, but I feel that shareholders have carried enough of the burden already from excessive indebtedness by this and countless other companies. Because I can identify no fundamental support for this rally, I share my fellow Fool Toby Shute's concern that investors may eventually feel fleeced by this fundraising craze.

Of course, the resulting improvement to liquidity is a welcome shift from the degree of uncertainty that faced these shares just a few months ago. In the context of a 40%-45% projected decline in 2009 revenue, this $600 million infusion could ultimately prove crucial for the company's survival if such market weakness persists.

Competitor Joy Global (Nasdaq: JOYG  ) , which I believe joins Bucyrus (Nasdaq: BUCY  ) among the best-positioned equipment manufacturers, is watching for mere stabilization of commodity demand before looking ahead to recovery. Caterpillar (NYSE: CAT  ) , for its part, has expressed some skepticism about any meaningful boost that might be expected from President Obama's $800 billion stimulus package.

With such uncertainty continuing to color the outlook for this sector, I urge Fools to exercise considerable caution approaching these stocks unless market conditions improve dramatically or this broader rally finally finds cause to question its very existence.

If enthusiasm for this rally proves finite, as I believe it may, then voluntary public financing of corporate debt will (at least temporarily) go extinct. When the dust settles, I don't want Fools to bear the scars of an attack like that from Tyrannosaurus Terex.

Further Foolishness:

Fool contributor Christopher Barker is the Nat King of Coal and the wild boar of iron ore. He can be found blogging actively and acting Foolishly in the CAPS community under the name TMFSinchiruna. He owns shares of Caterpillar. The Fool owns shares of Terex. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool's disclosure policy is busy learning Mandarin.


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11/21/2014 4:07 PM
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