Terex Should Buy Back Its Shares in Place of Fantuzzi

The juncture we find ourselves at can be simply summarized as highly anxious credit and stock markets with uncertain but anemic economic growth forecasts. Though the carnage in equity markets may well be indiscriminate and savage, Terex (TEX) is down a massive 80% this year, substantially underperforming its industry peer, Caterpillar (CAT).

click to enlarge

One critical investment decision that management now faces, in the context of current conditions, is straightforward:

Does the company proceed with the purchase of Fantuzzi, paying $267 million, or should Terex use that cash to buy back 28% of its outstanding shares? (At the current price of $10 per share).

- Fantuzzi is currently reporting earnings for a loss, represents less than 10% of Terex sales, and may turn profitable in 2009.

- 28% of Terex represents $161 million of PAT in 2008, (493 million for first nine months, 82 million estimate for 4Q). An authorization is already in place.

I believe the choice is very clear. Management is not responsible for the decimation of its share price this year, but is very responsible for being proactive and operating in the investment environment in which they find themselves, the interests of shareholders being paramount.

Doubtless there are clauses, possibly difficult ones, in exiting from the Fantuzzi acquisition discussions. But current conditions not only warrant it, they necessitate it. Regarding the clause of ‘material adverse conditions’, is there any doubt that the world has changed- materially- in the last six months? Would a Fantuzzi profit forecast made a mere six months ago have any credence today? If profit projections of listed companies are any reference, the resounding answer is “No!”

I was hence immensely relieved to read that Terex management has halted the Fantuzzi deal, as reported on Nov. 21. The next step is to pursue the acquisition of a very compelling company - their own shares.

The authorisation is in place. It would be enormously accretive to earnings: Interest foregone (say at 3%, taxed at 30%) on the $267 million would be $5.6 million, and the reduction in outstanding shares would be 28%. So on proforma, 2008 earnings per share would go up from $6.12 to $8.4, an increase of 38%!

So Dear Terex management, whatever your earnings are going to be in this incredibly uncertain 2009, you can increase it by 38% by replacing Fantuzzi with a buyback. I guarantee you that investors will reward the company for plain, common financial sense. This is the time to demonstrate confidence in Terex’s sustainability - and it’s the best use of the company's cash.

Disclosure: The author has a long position in Terex.

Comments

[Eric K:]

"Management is not responsible for the decimation of its share price this year, but is very responsible for being proactive and operating in the investment environment in which they find themselves, the interests of shareholders being paramount"

I fully agree with this comment. But to suggest they use the money instead to buy back shares is just as irresponsible. In this environment, a company the size of Terex needs to hang on to as much cash as possible. And to use it to buy back shares makes no sense.

2008 Nov 24 04:08 PM

[User 306051:]

I agree a share buyback makes alot mor sense that going forward on the Fantuzzi deal(albeit I do not know what potential penalty they incur to walk away). They also need to manage their cash in this environment. It's still uncertain the extent/duration of this recession.

Management being clear on what they'll be doing will go along way in convincing me into a long position.

Check out BUCY if you like TEX

2008 Nov 24 06:50 PM

[Fam62c:]

I agree with Eric K. If they can get out of this deal the better plan is to just keep the cash and keep the balance sheet solid. This is a downturn of unknown magnitude and duration, survival is what's most important. It's been my experience that buybacks do very little in this environment to prop up stock prices anyway. Everybody is selling everything and nobody cares about things like buybacks. You can never have too much cash in a recession.

2008 Nov 27 01:48 PM

[tnk4800:]

Stop the Fantuzzi deal? Typical short term, immediate gratification thinking. Has this guy read anything, studied, tried to understand the realities of explosive growth taking shape with CHINDIA? I don't think so, if he did he'd understand the incrediable value fantuzzi adds to your dollars invested in TEX. World Seaports,growth of Industry, Power & Refining Plants,.... Man your Talking Cranes!!! Lot's of Cranes. and Fantuzzi is a perfect fit and makes perfect sense for the Terex Crane Group now and well into the future.

Time to renegotiate the actual purchase amount for Fantuzzi and the terms of payment as current conditions do dictate that but dropping the deal would be costlier and not just because of the penalty to back out.

and another thing.... Caterpillar although part of the sector and industry it is certainly not a competitor to Terex. Cat targets dirt moving and has virtually become a marketing rather manufacturing retail commodity where as Terex is positioned to strike markets that have only two other competitiors Liebherr and Manitowoc, both of whom think and demand greater return on investments. This mans opinion certainly is justified from a bean counters view but in this industry sector an anylist needs to
get out onto a job site and see what equipment really makes the long dollar.....hint ...CRANES!!!!!

2008 Nov 28 05:40 PM

[DC1973:]

Of course Terex should pull outof the Fantuzzi deal - havent they made enough blunders in the past by buying poorly engineered Italian products (Italmacchina) and then tried to re-brand them under the Terex, Terexlift and finally Genie brand names to give some credability.

From A Terex dealer principal

2008 Dec 08 03:35 PM

[cranehopper:]

tnk4800
Dear Sir, Thank you for your clever foresight. In May/June 2009 the recession is over and then it's Terex choice now to be in one of the brightest future business or not. If they are long oriented winners they will choose one of the Best Groups in the Crane Business and have simultanously manufacturing sites in Germany, Italy and China. TO IT, no better time for.

Feb 06 07:43 AM

[r5r5r5:]

and now they SOLD their stock @13, what must you conclude ? MAChanges.

Jul 07 12:07 PM

[r5r5r5:]

Ouch- now they've SOLD their stk @$13.
MAChanges??????????//

Jul 07 12:10 PM