After narrowing losses considerably in its fourth quarter, Terex (NYSE: TEX ) is set to deliver another set of solid numbers. Analysts are expecting its earnings per share to turn around from a loss of $0.17 last year to a staggering profit of $0.22 per share in the first quarter.
Two things are helping make people upbeat about the equipment maker: (1) a rebound in its critical business area, construction, and (2) management's focus on cutting costs and improving margins.
Set to head north
Analysts are expecting Terex's revenue to jump a whopping 41.6% in the first quarter, driven by higher demand. Construction activity in the U.S. has picked up recently, as evidenced by the U.S. Census Bureau's latest data. The dollar value of total "construction put in place" in February was 5.8% higher than the previous year. An uptick was visible in the fourth quarter, when higher demand for construction equipment and cranes drove Terex's revenue up by 29%, and peer Manitowoc's (NYSE: MTW ) revenue up by 40%.
Higher prices should also help strengthen Terex's top line. After raising prices last year, the company implemented a second price increase in January. This should also help push its gross margin higher.
What I particularly like about Terex is the way its gross margin has grown in the past few quarters, indicating management's efficiency. From 13.3% in the first quarter last year, it climbed to a healthy 16.8% by the fourth quarter. Management expects gross margin to hit the 20% mark this year. So one can safely expect to see a continuation of the uptrend in the forthcoming earnings release.
Riding over challenges
Terex is bouncing back despite having considerable business in weak regions such as Europe, which accounts for more than a quarter of its revenue. Rising demand in the region drove Terex's order book and backlog higher in the fourth quarter. Equipment king Caterpillar (NYSE: CAT ) , which derives nearly a quarter of its revenue from Europe, also reported higher orders from its European dealers in the fourth quarter.
These companies attribute a good part of equipment demand to the customers' need to replace aging machines. Terex, in fact, hired nearly 500 employees at two U.S. plants in the first quarter to meet the rising replacement demand. Caterpillar also expects such demand to push up revenue from the European region.
A lot of focus this year will be on Terex's integration of Europe- based Demag Cranes, which was acquired last year. With manufacturing operations across five continents, Demag should provide great impetus for Terex's global expansion plans.
The Foolish bottom line
Terex ended 2011 with a 65% larger backlog as compared to the previous year, a major chunk of which is attributed to Demag. I'm expecting Terex to hit the right note with smashing numbers. The stock has had a very good run since January, and a set of good numbers is all it needs to keep going higher.
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