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I'm rooting for the major cogs in the American industrial complex to forge the beginnings of a sustainable economic recovery against formidable odds. But wishing a company well and deciding to invest one's hard-earned capital in the stock are not one and the same.
Although I have considerable respect for this well-run company's efforts to reduce its cost structure and set the stage for a gradual recovery, I do not consider the shares of equipment manufacturer Terex (NYSE: TEX ) a particularly attractive investment at this juncture. Let me reiterate: It's a high-quality company executing very well in adapting to a challenging business cycle, but above $26 I simply conclude that the shares have surged too far, too fast. Accordingly, I have closed my bullish CAPScall on the stock with a 6.5% gain that moderately outperformed the S&P 500 over the trailing 7-month period.
Even that moderate gain was hard-won, as the stock's gut-wrenching collapse last year to beneath $10 per share made my bullish call appear highly questionable for a while there. My previous bullish call on Terex had been far more convincing, yielding a 60% gain in less than four months before I suggested the stock was poised for a pullback just over a year ago. While I don't anticipate a repeat of last year's dramatic 75% collapse from peak to trough, I do consider it likely that a better entry point into the shares is likely to present itself. I hope to repeat the cycle once again by renewing my bullish call somewhere beneath the current price. By going against a trio of recent buy recommendations from analysts, I recognize that this Foolish outlook goes against the grain. But what could be more Foolish?
Three factors have come together to inform my near-term bearish outlook on the shares. For starters, Terex is presently trading at a premium to some peers whose respective end-user markets are on far firmer ground. Based on the midpoint of Terex's guidance for 2012 earnings, the stock trades at a P/E multiple of about 15. Now, keep in mind that increasing equipment demand from small mines formed a particular bright spot amid Terex's recent discussion of end-user markets in 2011. And recall, also, that after Bucyrus acquired Terex's attractive line of larger mine equipment, Bucyrus was then acquired by industrial heavyweight Caterpillar (NYSE: CAT ) in turn. Based upon average analyst estimates for 2012 earnings, both Caterpillar and mining equipment specialist Joy Global (NYSE: JOY ) are trading at about 11 times estimated 2012 earnings. Deere (NYSE: DE ) sports an even leaner P/E of just 10. And all three of those peers pay a dividend! Applying a similar multiple to Terex would equate to a share price of about $18 to $21, and I may reassess my outlook on the shares if they dip into that range in the near term.
The second factor relates to the technical picture, which, according to my read of the chart, shows an overbought condition with relatively little legroom before substantial resistance looming at the $30 level.
The third and final factor behind my call is more macroeconomic in nature. Within the company's recent earnings release, Terex Chairman and CEO Ron DeFeo noted: "Our forecast assumes there is not a material worsening of the European debt crisis." Personally, I perceive risk in that assumption, since to this skeptical Fool this week's $172 billion bailout of Greece's acute debt crisis represents little more than a kicking of the proverbial can down a potentially dangerous road. It's a page straight out of the Federal Reserve's own playbook. In my view, the Dow Jones Industrial Average (INDEX: ^DJI ) has ridden a wave of optimism to reach 13,000, enhancing the potential for a near-term pullback there as well.
I think Terex is a terrific company, and I look forward to reinstating a bullish CAPScall the moment I feel I could do so without chasing this remarkable surge in the stock (and the equity markets overall). A 47% year-over-year increase in revenue corroborates the company's observation of "further recovery in many of our end markets as utilization rates improve and existing fleets age." Of course, I wish I had been a buyer near $10 per share! That was the sort of disjointed valuation that permits a serenely confident entry into a stock, and the sort of condition I thrive on as a value investor. By holding out for an entry price of $21 or better, I could potentially find myself with a 20% gain by the time the shares work their way back to their present level. If I am wrong, the only loss is a missed opportunity. But if I am correct, perhaps I will have helped my readers to a market-beating position in the stock for a third consecutive time. To catch my next bullish call on the stock, I encourage Fools to bookmark my article list, follow me on Twitter, or watch Terex using the MyWatchlist link below.
- Add Terex to My Watchlist
- Add Caterpillar to My Watchlist
- Add Joy Global to My Watchlist
- Add Deere to My Watchlist
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