February 19, 2015 Terex Corporation Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Underperform Date of Last Change 01/04/2015 Current Price (02/18/15) $26.80 Target Price $28.00 52-Week High $44.74 52-Week Low $22.46 One-Year Return (%) -38.26 Beta 3.50 Average Daily Volume (sh) 2,179,476 Shares Outstanding (mil) 108 Market Capitalization ($mil) $2,894 Short Interest Ratio (days) 4.15 Institutional Ownership (%) 91 Insider Ownership (%) 3 Annual Cash Dividend $0.20 Dividend Yield (%) 0.75 5-Yr. Historical Growth Rates Sales (%) 14.1 Earnings Per Share (%) 109.5 Dividend (%) N/A using TTM EPS 11.4 using 2015 Estimate 10.2 using 2016 Estimate 8.0 Zacks Rank *: Short Term 1 3 months outlook 4 - Sell * Definition / Disclosure on last page SUMMARY Risk Level * (TEX-NYSE) Terex reported fourth-quarter 2014 adjusted earnings of $0.72 per share, improved 10.8% year over year. However, revenues declined 1.2% year over year to $1.79 billion in the quarter. Terex guided adjusted earnings per share for 2015 in the range of $2.00 to $2.30 and net sales in the band of $6.2 $6.6 billion. Terex remains concerned that currency and the ASV disposition will negatively affect net sales and earnings. Additionally, Construction and Cranes business remain challenging due to uncertainty in the non-residential construction sector. While, progress on the improvement program on incremental operating profit over the next few years bodes well for the company. Furthermore, tax and cash generation initiatives remain on track. Thus, we are reaffirming our Neutral recommendation on Terex with a target price of $28. Average, Type of Stock Mid-Value Industry Mach-Const/Mng Zacks Industry Rank * 248 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 1,654 A 1,862 A 1,757 A 1,812 A 7,084 A 2014 1,655 A 2,055 A 1,810 A 1,789 A 7,309 A 2015 1,666 E 1,999 E 1,814 E 1,035 E 6,514 E 2016 7,519 E Note: Quarterly figures for 2013 will not add up due to rounding off. Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.22 A $0.64 A $0.73 A $0.65 A $2.23 A 2014 $0.28 A $0.76 A $0.59 A $0.72 A $2.35 A 2015 $0.44 E $0.86 E $0.69 E $0.65 E $2.64 E 2016 $3.36 E Note: Quarterly figures for 2013 will not add due to rounding off. Projected EPS Growth - Next 5 Years % 8 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
RECENT NEWS Terex (TEX) Q4 Earnings Beat Estimates, Revenues Miss Feb 17, 2015 Terex Corporation fourth-quarter 2014 adjusted earnings of $0.72 per share improved 10.8% year over year and also surpassed the Zacks Consensus Estimate of $0.68, a positive surprise of 5.9%. Including one-time items, Terex reported earnings per share of $0.71 in the reported quarter compared with $0.72 in the year-ago quarter. Operational Update Revenues in the quarter declined 1.2% year over year to $1.79 billion from $1.81 billion. Revenues also missed the Zacks Consensus Estimate of $1.86 billion. Cost of goods sold increased 1.7% to $1.45 billion from $1.43 billion in the year-earlier quarter. Gross profit dropped 12% year over year to $339 million. Gross margin also contracted 200 basis points to 19%. Selling, general and administrative expenses decreased 5.6% year over year to $268.6 million. The company reported operating income of $70.4 million, down from $131.4 million recorded in the year-ago quarter. Segment Performance The Aerial Work Platforms (AWP) segment s revenues decreased 2.9% year over year to $468 million. Operating income decreased 46% to $38.7 million from $71.5 million in the prior-year quarter. The Construction segment s revenues were $206.4 million, up 6.7% year over year. The segment reported operating income of $0.6 million compared with the breakeven results in the year-ago quarter. Revenues for the Crane segment went down to $474 million from $480 million in the year-ago quarter. The segment reported operating income of $34.6 million, a 34.6% improvement from $25.7 million in the year-earlier quarter. In the Material Handling & Port Solutions (MHPS) segment, revenues went down 2.5% year over year to $515.6 million. The segment posted an operating loss of $31 million in the quarter contrary to a profit of $26 million in the year-ago quarter. The Material Processing segment s revenues were $164 million, up 9.7% year over year. The segment reported operating income of $18.2 million, up 9% from $16.7 million in the year-ago quarter. Financial Position Terex had cash and cash equivalents of $478 million at the end of 2014 compared with $408 million as of 2013-end. Total debt of the company was $1.8 billion as of Dec 31, 2014, marginally down from $2 billion as of 2013-end. The company generated cash flow from operations of $41.7 million in 2014 compared with $188.5 million in 2013. In 2014, Terex repurchased shares worth approximately $5.3 million under its previously authorized share repurchase program. Additionally, the company announced a new $200 million share repurchase authorization. Equity Research TEX Page 2
Terex also declared a 20% increase in its quarterly dividend to $0.06 per share from $0.05 in 2014. The dividend will be paid on Mar 19, 2015 to shareholders of record as on Mar 10, 2015. On Dec 22, 2014, Terex successfully completed the formation of its joint venture ( JV ) with Manitex International, Inc. and closed the previously announced sale of 51% of A.S.V., Inc. to Manitex. As a result of the transaction, Terex now owns 49% and Manitex owns 51% of ASV. Backlog Backlog of orders to be filled during the next 12 months was around $2 billion as of Dec 31, 2014, a sequential increase of 17.4% and a 9.5% year-over-year rise. 2014 Performance Terex posted adjusted earnings of $2.35 per share for 2014, which increased 5.4% year over year. It also topped the Zacks Consensus Estimate of $2.30 per share. Streamlined business portfolio, reduction in cost structure, innovative new products offerings and simplified operations led to the growth. Earnings however, touched the lower end of management s guidance range of $2.35 to $2.50. Including special items, earnings were $2.27 per share for the year compared with $1.79 in 2013. Revenues for the full year increased 3.2% year over year to $7.31 billion from $7.08 billion in 2013. Revenues, however, lagged the Zacks Consensus Estimate of $7.38 billion and were at the lower end of the company s guidance range of $7.3 $7.5 billion. 2015 Guidance Terex expects adjusted earnings per share for 2015 to be in the range of $2.00 to $2.30. The company guided net sales for the full year in the range of $6.2 $6.6 billion. Terex remains concerned that currency and the ASV disposition will negatively affect net sales between $650 million and $750 million and earnings per share between $0.15 and $0.20. Terex is also making progress on the improvement program, targeting $202 million of incremental operating profit over the next few years. Furthermore, tax and cash generation initiatives remain on track. However, the outlook for Construction and Cranes business remain challenging due to uncertainty in the non-residential construction sector. Equity Research TEX Page 3
VALUATION Currently, shares of Terex are trading at 10.2x our 2015 EPS estimate of $2.64. The company s current trailing 12-month earnings multiple is 11.4x, compared with the peer group average of 15.9x. Over the last five years, shares of Terex have traded in a range of 9.6x to 208x trailing 12-month earnings. We are reaffirming our neutral recommendation on Terex, which indicates that it will perform in line with the market. Our target price is $28, based on 10.6x 2015 EPS. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Terex Corporation (TEX) 10.2 8.0 7.8 6.9 11.4 208.0 9.6 Industry Average 15.1 13.5 8.6 7.5 15.9 83.0 10.8 S&P 500 16.7 15.6 10.7 15.3 19.3 19.4 12.0 Komatsu Ltd. (KMTUY) 14.7 14.3 2.7 8.4 12.8 55.5 9.1 Caterpillar Inc. (CAT) 17.9 17.3 9.4 7.2 13.4 30.0 8.9 The Manitowoc Company, Inc. (MTW) 16.4 14.6 6.9 9.5 19.0 158.5 14.9 Joy Global, Inc. (JOY) 13.8 12.2 15.0 9.3 13.4 21.3 7.2 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Terex Corporation (TEX) 1.1 2.2 0.5 12.4 0.8 0.9 7.2 Industry Average 2.3 2.3 2.3 18.4 1.2 2.4 7.1 S&P 500 5.3 9.8 3.2 25.5 N/A 2.1 N/A Equity Research TEX Page 4
Earnings Surprise and Estimate Revision History NOTE THIS IS A NEWS-ONLY UPDATE; THE REST OF THIS REPORT HAS NOT BEEN UPDATED YET. Equity Research TEX Page 5
OVERVIEW Terex Corporation (TEX) is a global equipment manufacturer catering to the construction, infrastructure, and surface mining industries. The company s manufacturing facilities are located in the U.S., Canada, Europe, Australia, Asia and South America. Terex sells its products through a worldwide distribution network. The company has five reporting segments. Aerial Work Platforms (AWP) (Approximately 32% of total 3Q14 revenue) This segment designs, manufactures, and markets aerial work platform equipment, telehandlers, power equipment, construction trailers and utility equipment. Materials Handling & Port Solutions (MHPS) (25%): This segment is involved in the design, manufacturing and marketing of industrial cranes, including standard cranes, process cranes, rope and chain hoists, electric motors, light crane systems and crane components and port equipment. Cranes (23%): This segment designs, manufactures and markets mobile telescopic cranes, tower cranes, lattice boom crawler cranes, truck-mounted cranes and telegraphic container stackers, as well as related components and replacement parts. Construction (11%): This segment designs and builds heavy and compact construction equipment, Road building equipment including asphalt and concrete equipment, landfill compactors and bridge inspection equipment. Material Processing (MP) (9%): This segment designs and manufactures materials processing equipment, including crushers, washing systems, screens, apron feeders, chippers and related components and replacement parts. Terex also offers a complete line of financial products and services to assist in the acquisition of equipment through Terex Financial Services. Equity Research TEX Page 6
REASONS TO BUY Terex is constantly evaluating its cost structure in response to the changing market conditions. The company initiated a restructuring program in the Material Handling & Port Solutions (MHPS) segment in 2013 to realize cost synergies and to optimize the selling, general and administrative expense structure. This program which was completed in 2014 resulted in the closing of a production site in Spain and outsourcing of the related future production. The company also completed a restructuring program in the segment in 2014 resulting in the consolidation of certain production facilities and the redesign of certain back office functions. During the third quarter of 2014, the company established a restructuring program in the MHPS segment to close one of its manufacturing facilities in Germany and relocate production. The program is expected to cost $10.7 million, result in the reduction of 84 team members in Germany and be completed in 2015. In 2013, Terex established another restructuring program in the Construction segment related to the distribution organization for Europe, the Middle East and Asia. The program, which costs $1.9 million, resulted in the reduction of 19 team members and was completed in 2014. During the third quarter, Terex refinanced its existing senior secured credit facility with a new $1.1 billion senior secured credit facility. The new credit facility extends the maturity date for the revolving line of credit, lowering cost of borrowing along with increasing liquidity. Additionally, the company repaid $51 million in debt during the quarter, most of which was to pay down borrowings in Italy. Terex continued to repurchase stock during the third quarter, and combined with dividend, represented a use of cash of $12 million in the period. During the quarter, Terex repurchased shares worth approximately $11 million under its previously authorized share repurchase program. Further repurchase will also support the stock. On Dec 22, Terex announced the successful completion of the formation of its joint venture ( JV ) with Manitex International and the closure of the previously announced sale of 51% of A.S.V., Inc. to Manitex. ASV. As a result of the transaction, Terex now owns 49% and Manitex owns 51% of ASV. The formation of this JV is positive for both Terex and ASV. Terex will maintain its broad compact equipment product offering and its participation in an expected housing recovery after the transaction. The JV resulted in more than $125 million of cash received by Terex, including cash from a recapitalization of ASV prior to closing and a significant amount in tax benefits. Terex will use a portion of the cash to acquire $12.5 million of newly issued Manitex shares and $7.5 million of convertible debt securities. Terex has outlined specific initiatives to reduce costs by $200 million over the next few years with the largest cuts occurring in the aerial and crane segments. The company has also targeted a reduction in the company s tax rate by 300 basis points, a debt reduction and share-repurchase target of $300 million to $500 million and a working capital improvement target of over $300 million. Terex is working intensely on more than 50 projects, which will lead to an improvement of about $200 million in operating profit within the next couple of years. REASONS TO SELL Terex lowered its adjusted EPS guidance to the range of $2.35 $2.50 for 2014, down from the prior expectation of $2.50 $2.80. The company reiterated its 2014 net sales range of $7.3 $7.5 billion. Terex s backlog of orders to be filled during the next 12 months was around $1.7 billion as of Sep 30, 2014, a sequential decline of 22.5% and a 5.1% year-over-year decrease. Backlog in the reported quarter decreased sequentially across all segments. Aerial work platform (AWP) backlog fell almost 50% sequentially and roughly 30% year over year, leading to a book-to-bill of 0.66. The prospects of a decline in AWP operating profits next year, coupled with pronounced weakness in the crane category and weakening backlog in port solutions from project run-offs, creates significant uncertainty on 2015 earnings. Equity Research TEX Page 7
The US Architecture Billings Index (ABI) is an economic indicator that provides an approximately nine-totwelve-month glimpse into the future of non-residential construction spending activity. The November ABI score was 50.9, down from a mark of 53.7 in October. Demand for design services has slowed somewhat from the torrid pace of the summer, but all project sectors witnessed modest growth. Though architecture firms are expecting solid mid-single digit gains in revenue for 2014, but heading into 2015, they are concerned with finding quality contractors for projects, coping with volatile construction materials costs and with finding qualified architecture staff for their firms. Terex s revenues in developing markets and Australia continue to remain relatively weak. Moreover, pricing pressure, adverse currency fluctuations, commodity price volatility and competition remain headwinds in the near term. DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of TEX. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1126 companies covered: Outperform - 15.8%, Neutral - 76.0%, Underperform 7.4%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research TEX Page 8