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Why Terex Corporation Slumped More Than 12% in August

By Lee Samaha - Sep 10, 2018 at 1:00AM

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After the company posted a good set of earnings, investors decided to take a dim view of prospects.

What happened

Shares in construction equipment company Terex Corporation (TEX -0.70%) fell 12.2% in August, according to data from S&P Global Market Intelligence. Since most of the fall occurred in the immediate aftermath of the second-quarter earnings report, which came out on the last day of July, it's reasonable to conclude that investors didn't like something about Terex's presentation.

Terex materials processing equipment.

Terex materials processing equipment. Image source: Terex Corporation.

If so, then the displeasure wouldn't have been gleaned from the headline numbers. As fellow Fool Rich Smith observed, Terex stock dropped 10% post-earnings, despite a 19% sales increase and a 31% increase in backlog. The strong set of earnings, with EPS of $0.98 coming in ahead of analyst expectations for $0.90, encouraged management to raise the low end of its full-year EPS guidance range to $2.80-$3, up from a low figure of $2.70. Full-year sales are now expected to be $5.1 billion -- a $350 million increase over previous guidance.

So what

There are probably two separate reasons the market took a dim view of events. First, Terex continues to have operational issues with its cranes segment. Cranes generated 24.4% of sales in the first six months, with aerial work platforms and materials processing contributing 52.2% and 23.4%, respectively. But the cranes segment lost $22 million in the first six months.

The problem isn't so much about end demand, which management describes as "stable," but rather "material supply challenges" that are causing disruptions in Terex's production plants. As a consequence, the cranes segment margin was negative in the first six months and came in below most investors' expectations.

The second reason is the seemingly never-ending debate over the length of the construction cycle. Terex bears are afraid that equipment sales are in the late part of the cycle and are therefore set to turn down in the near future. Of course, when sales start to slow with cyclical companies, their margin and earnings tend to come under pressure.

Now what

Terex's management takes a far brighter view of prospects. CEO John Garrison sees the supply-chain issue with cranes as improving in the second half. If so, margin performance should improve in the segment.

Moreover, Garrison remains positive on Terex's end markets. "Detailed market analysis continues to indicate that we have multiple years of growth ahead of us, driven by underlying market growth, replacement demand, and increased adoption in Europe and developing markets," he said on the earnings call.

Investors should focus on both issues, because if Garrison is right, then the dip could provide investors with a nice buying opportunity.


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