The last six months have been a dream run for Terex Corp (TEX) with positive returns of ~73%. Terex is a relatively small sized company when compared to the big giants like Caterpillar (CAT) and Deere & Co. (DE). However, its shares surpassed both Caterpillar and Deere, whose shares showed positive upside of only ~16% and ~21%, respectively. Terex's stock returns even surpassed the S&P 500's returns with great margins.
Source: Yahoo! Finance
Future Shots of Growth
The factors that will benefit this company in 2013 are its Aerial Work Platform segment, Demag integration/cost cutting, better pricing and new product launches. Although all these factors will help the company do well in the future, I discuss below the AWP segment and Material Handling & Port Solution (MHPS), which are expected to show immediate results in 2013.
Aerial Work platform: This segment looks positive for the next two years, with expected 8.9% of top line growth in 2013. There has been increased replacement demand in the North American rental channel and a moderate increase in Europe and Latin America. The company is expected to receive international orders for its Aerials from Mills Estructuras Brazil, a rental company. It must be noted that Mills Estructuras is the same company which sold its old fleet at a higher price than it was purchased at because of the higher demand. Now the company is looking for replacements for the future potential and Terex will be the natural choice for these orders. This opportunity will help Terex to generate two times increased volume growth in the coming year and also command a price increase of ~3% to ~4%. With anticipation that the domestic market is all about replacements this year as the companies are looking forward to replacing their old fleet from 2005 it should provide significant opportunities to Terex.
Material Handling and Port Solution: The integration of the Demag acquisition is expected to lead a longer term cost saving of ~$35 million. Demag cranes AG was acquired by Terex in 2011 and was integrated in its MHPS business segment. The AG cranes have a major geographical presence in India, Brazil and China and contribute ~40% of the sales. Further, Terex is looking forward to the cost synergies of about ~$35 million out of which ~$10 million was expected in 2012 and the remaining in 2013 with this acquisition. These savings will be further used to offset the purchase accounting cost and is expected to give improved margins and increased earnings. The Company has received a ~€220 million contract for the supply of equipment for the Post of Rotterdam expansion project which is expected to have a positive impact on the sales in 2013.
Caterpillar: The Company recently reported its fourth quarter and FY 2012 results which were impressive despite the prevailing macro challenges. It posted 2012 revenue of ~$65 billion which was up by ~10% y/y. However, the fourth quarter results were slightly dull with revenue down by ~6% y/y at ~$16 billion. The dealers for the company reduced their inventory levels by ~600 million in 4Q which adversely impacted the sales. I expect this to continue till 1Q13 until the demand for machinery pushes back inventory levels and the dealer order rates. Along with its strong product portfolio and a robust distribution network, Caterpillar is now seeking growth in the Oil and Gas market. For this it made a joint venture with the Ariel Corporation which will work under the name of Black Horse LLC. This JV will help its customers by providing wells service pressure pumping products in the oil and Gas market. Further, an acquisition has been made in this JV of ProSource which is well known for manufacturing and designing of reciprocating pressure pumps. This JV and the acquisition will result in cost savings which will be leveraged in Caterpillar's R&D and technological advancement.
Deere: The Company is well positioned with its leadership in agricultural equipment and its growth plans. The company had a solid quarter where it posted record revenue which was up ~14% mainly due to the increase in overall prices by 4% and its innovative equipment giving more optimistic view for 2013. The company remains focused towards its innovations and has launched many new products such as the efficient water management solution, Tier 4 engines as FarmSight which is an integrated wireless technology which links equipment, operators, managers, dealers and agriculture consultant to achieve machine optimization. Deere remains committed towards its R&D and keeps making heavy investment as in 2012 it invested ~4% of its sales in R&D segment.
I feel that Terex with its cost cutting initiative, pricing strategy (increase of 3 -4%) and strong outlook for AWP will show strong sales potential in 2013. The AWP segment will be able to deliver more than ~8.2% of sales growth in 2013. In the last one year stock of the company has witnessed a growth of ~98% and further the company has increased its EPS forecast for 2013 to ~$2.75 per share higher from the consensus estimate of ~$2.16. I think the best from this stock is yet to come which the investors can anticipate in the second half of 2013.