Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
All year long, Terex (NYSE:TEX) stock has been pacing the S&P 500's performance -- and even leading it a bit, up 15% to the market's 14% gain. Today, shares are moving in and out of negative territory.
But pay the market's daily gyrations no heed. At least one analyst thinks Terex is a buy.
Jefferies & Co. upgraded Terex from hold to buy today. Priced around $40 a share now, the analyst thinks Terex shares could hit $50 within a year -- a 25% gain -- according to an update just out on TheFly.com.
Jefferies bases its forecast on "improving backlog and visibility into 2019," which should translate into sales gains down the road, and sales of cranes in particular. What's more, the analyst argues that Jefferies has "significant internal margin opportunities" to improve the profit margin it earns on those sales.
Additionally, the analyst is forecasting additional share repurchases that will help to concentrate Terex's profits among fewer shares outstanding, boosting earnings "beyond current consensus."
What other analysts are saying
So what is that consensus on Terex's earnings power, you ask? Well, according to consensus data quoted by S&P Global Market Intelligence, Terex is expected to more than double last year's $1.36 per share in diluted earnings to $2.81 per share in 2018. Earnings could grow as much as 30% next year ($3.66 per share) and then a further 19% in 2020 to $4.36 -- and average 21% annual growth over the next five years.
That seems an awfully fast growth rate for a heavy equipment manufacturer like Terex, which splits its business three ways -- aerial work platforms (about 48% of revenue), cranes (27%), and materials processing (25%). Still, if Terex manages to hit the targets that Wall Street has set for it, it's hard to argue the stock is anything but a bargain at 16.5 times trailing-12-month earnings -- and only 14.8 times free cash flow.
What Terex itself said last quarter
So are these growth forecasts believable? Last quarter, in Terex's Q1 2018 earnings report, CEO John Garrison noted that Terex's "strong financial performance reflects the improvements made to our operations and capital structure, and broad-based improvements in our global markets." Both aerial work platforms and materials processing were "off to a great start," while cranes "improved compared to the prior year."
Its profit margin is marching upwards. At 5% operating profit margin for the past 12 months, Terex is already doing better than the 3.7% operating profit margin it booked last year, which was in turn up 30 basis points from the 3.4% margin achieved in 2016. Terex may not yet be back at the 7.3% margin it was earning in 2014 just yet, but that just means there's room for improvement -- and historical evidence that such improvement is achievable.
As a result, Terex felt confident enough last quarter to boost its earnings guidance for this year to $2.70 to $3.00 per share.
Granted this was an adjusted earnings forecast, but according to analysts who follow the stock, the difference between Terex's GAAP earnings this year and its pro forma adjusted profits is only going to be about $0.08 per share. This suggests to me that Jefferies' prediction of $2.81 per share in GAAP earnings is probably in the ballpark. (And of course, Terex's free cash flow numbers are looking better than reported GAAP earnings, which is another point in the stock's favor.)
Assuming Terex delivers on its promise this year, and continues to grow as fast as analysts expect it to in years to come, I think Jefferies is more likely right than wrong that this stock will outperform the S&P 500 going forward.