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Andrew Liyana

TEX AT A GLANCE

P/E ► -3.23   EV/EBITDA ► -9.34   ROA ► -9.2% LOW ROE ► -32.9% AVG Debt to Equity ► 2.25 AVG Current Ratio ► 2.57 AVG Interest Coverage Ratio ► -6.00 LOW

 

 

 

 

 

 

^[1] Terex (NYSE: TEX) manufactures equipment for the construction and mining industries. Construction firms such as Fluor (FLR) and Foster Wheeler (FWLT) buy Terex's cranes, backhoes, excavators, and other related equipment to use in residential and commercial development. Terex also manufactures drilling and crushing equipment, as well as high capacity hauling trucks for use by mining companies like Freeport-McMoRan Copper & Gold (FCX) and Southern Peru Copper (PCU).

Demand for Terex's products depends largely on Commodities Prices and global economic growth. When commodities prices increase, Terex benefits from increased demand for its products from the companies that produce commodities. Similarly, when the global economy is expanding, Terex earns more contracts for infrastructure development. Economic expansion combined with soaring commodity prices helped Terex average a 24% annual increase in sales over the last five years.^[2]

In addition to private sector demand, governments also impact Terex's sales. As countries industrialize, improve transit systems, and build public facilities, the need for construction equipment rises. Terex already generates 70% of its $9.1 billion in annual sales overseas, much of it from countries with developing market economies.^[3].

Terex's competitors, such as Bucyrus International (BUCY) and Deere & Company (DE), have also reaped rewards from oversea operations. Another competitor,Caterpillar (CAT), began construction on a 350,000 square foot manufacturing site in Shanghai, and other rivals such Liebherr Group and Manitowoc Company (MTW) also increased output capabilities.^[4]. If fears of a global recession are realized, Terex and its competitors will suffer from a supply glut that does not match decreased demand for construction equipment.

Business Overview

Terex's business is divided into five segments.

Aerial Work Platforms

The aerial work platforms segment represents the largest percent of 2007 revenue (26% or $2.3 billion) and income from operations (47% or $435.1 million), and therefore, greatly impacts overall profitability.^[6]. Companies in construction and building maintenance use aerial work platforms, which are substitutes for ladders and scaffolding, to build and maintain large structures. The Aerial Platforms division has exposure to the soft U.S. residential construction market, which resulted in sales in the United States falling 6% in 2007 compared to 2006^[7]. However, overall growth remained positive as 45% of revenue from this division were generated internationally, which showed a 47% rise in revenue^[8].

Construction

Using 13 major manufacturing sites (and soon to open one in China during mid-2008), Terex Construction accounted for 20% of total 2007 revenue and 6% of income from operations^[9]. This branch manufacturers heavy (ex. off-highway trucks) and compact (ex. backhoes) construction equipment that customers use in infrastructure and construction projects involving sand, gravel, coal, and minerals operations. Net sales increased 17% in 2007 from 2006 as European demand for construction equipment rose^[10].

Cranes

Terex manufacturers a wide range of cranes that customers use to construct, repair, and maintain infrastructure, building, and manufacturing sites. Terex plans to begin manufacturing cranes at its second Chinese site this year. This thirteenth manufacturing facility will add supply capacity to one of Terex's fastest growing business segments (revenue growth was 28.4% in 2007)^[11]. Last year, this division generated 24% of Terex's total sales and 27% of its income from operations^[12].

Materials Processing and Mining

Accounting for 23% of 2007 revenue and 25% of income from operations,^[13] the Materials Processing and Mining division manufacturers an assortment of equipment used in mining operations. Linked heavily to Commodities Prices, mining equipment demand increased in 2007, which helped boost sales 28.8%. Europe and India showed the most strength^[14].

Roadbuilding, Utility, and Other

As the smallest of Terex's five business segments (7% of 2007 revenue), it was the only one to report a operating loss in 2007^[15]. Relying heavily on government and utility customers, Terex manufactures equipment that helps with road and bridge construction, in addition to utility construction and repair. A weak Housing Market in the United States dampened demand for concrete mixers last year^[16].

Overall Financials

The following graphs^[17] show revenue and income from operations over the past three years.

Terex generated positive revenue and profit growth over the past three years as it benefited from increased international sales and favorable Exchange Rates. Management cites a favorable product mix that boosted average prices of sold equipment. Further, expansion in China and rising Commodities Prices benefited sales of Terex equipment. On the downside, the United States added little growth as did the roadbuilding and utility business segment^[18].

Geographical Sales and Focus

During 2007, sales in the United States were 30.4% of total revenue - UK 30.4%, Germany 7.4%, All other European Countries 26.3%, and all others 28.3%^[19]. Terex's goal is to divide sales evenly between the Americas, Europe, Africa, the Middle East, and Asia. By doing so, management hopes to decrease the cyclical nature of construction and mining equipment; one part of the world may have economic weakness, but another one could still be doing quite well. Terex is placing emphasis on Emerging Markets such as China, India, Russia, the Middle East, and Latin America^[20].

Key Trends and Forces

• Global spending on infrastructure will impact Terex's sales growth. Rapid growth of building new infrastructures in Emerging Markets has supported demand for cranes. One of Terex's competitors, Manitowoc Company (MTW), expects its crane segment sales to grow by 20% in 2008^[21]. In 2007, Merrill Lynch upped its forecast of infrastructure spending by Emerging Markets over the next three years to $1 trillion dollars from a previous estimate of $705 billion. Merrill Lynch sees countries, especially China, mobilizing their vast savings into infrastructure projects^[22]. All five business segments of Terex stand to benefit from the international growth if infrastructure spending remains strong. More mature markets, such as the United States and countries in Western Europe, are more focused on rebuilding and maintaining their infrastructures, but represent a significant amount of spending. In 2007, the United States passed a bill to spend $284 billion over the next six years for highway, energy, and mass transit infrastructure^[23].

• Commodities Prices influence demand for the mining equipment that Terex sells. The Material Processing and Mining division accounts for roughly a quarter of Terex's business. Demand for this segment's products is largely based on mining output. When Commodities Prices rise, production follows. These mining companies need new equipment and replacement products to maintain and expand operations. Customers use Terex's product line for surface mining, which includes extraction of metals, such as copper and iron ore, which is used in steel production. The following two graphs^[24][25] show how Copper Prices have increased over the past five years, and how mining companies expanded their capital expenditures as they ramped up extraction of minerals.

Rising steel prices also impact Terex in a negative way. Terex's manufactured equipment has steel components. As the price of this cost input rises and Terex cannot pass the prices to customers, then profit margins decrease.

• Demand for Commercial and Residential Construction can affect Terex's revenue and income. Expanding growth in economies tend to boost demand for construction of residential and/or commercial properties. The upswing in construction helps Terex sell more equipment, but an economic downturn hurts Terex. As the housing market softened in the United States, Terex's Aerial Work Platform business suffered a decline in domestic revenue from 2006 to 2007^[26]. However, commercial construction remained relatively strong and prevented a further drop in revenue. Manitowoc Company (MTW), a competitor of Terex, reported that U.S. nonresidential construction grew 9% in 2007 and believes the upswing in commercial construction should continue through at least 2009^[27]. Terex's business plan is to offer a wide range of products (some used early and others late in business cycles) and to expand geographically distribution of sales in order to diminish the cyclical swings in profits^[28].

^[29]

Competition

Terex's wide range of products (makes equipment for mining extraction and commercial, residential, infrastructure construction) leads it to compete with a variety of firms. While no one company competes against Terex in all sectors,^[30], it faces competition from larger corporations such as Caterpillar (CAT), Deere & Company (DE), and international giants, Volvo and Komatsu. In addition to other diversified manufacturers, each division of Terex faces competition from niche firms that focus on a particular part of the market. For instance, Terex Material Processing and Mining Unit shares a market with companies like Joy Global (JOYG) and Bucyrus International (BUCY) that only manufacture mining equipment.

In order to compete better, Terex seeks to improve customer responsiveness, and has hired more professionals to sales and marketing to address this issue^[31]. Further, with two Chinese manufacturing sites going into service in 2008, Terex hopes to lower manufacturing costs and allow it to improve its competiveness against firms in the growing East Asia markets^[32].

Market Share and International Sales

This table^[33] compares sales and markets for large companies in the Farm and Construction Machinery Industry. For those companies operating in the mining industry, an extra column indicates each firm's global market share in the $17.7 billion market for mining equipment^[34]. Terex also competes in a larger heavy equipment construction market that is estimated at $81 billion globally^[35]. The company's aerial work platforms lies within the elevator and escalator industry, which accounts for a $11 billion market^[36].

^Estimates generated by the business segment of specified company include heavy equipment that can be used in highway construction in addition to mining. As a result, the actual market share percentage is likely lower.

References

1. ↑ Terex Company Website
2. ↑ Terex (NYSE: TEX) Form 10-K, FY 2007, "Selected Financial Data" Page 32
3. ↑ Terex (NYSE: TEX) Form 10-K, FY 2007, "Overview" Page 33-34
4. ↑ [http://www.siteselection.com/features/2006/nov/machinery/ Site Selection Magazine Online
5. ↑ Terex Company Website
6. ↑ Terex (NYSE: TEX) Form 10-K, FY 2007, "2007 compared with 2006" Page 35
7. ↑ Wall Street Journal
8. ↑ Terex (NYSE: TEX) Form 10-K, FY 2007, "Terex Aerial Platforms" Page 36
9. ↑ Terex (NYSE: TEX) Form 10-K, FY 2007, "2007 compared with 2006" Page 36
10. ↑ Terex (NYSE: TEX) Form 10-K, FY 2007, "2007 compared with 2006" Page 37
11. ↑ Terex (NYSE: TEX) Form 10-K, FY 2007, "2007 compared with 2006" Page 37
12. ↑ Terex (NYSE: TEX) Form 10-K, FY 2007, "2007 compared with 2006" Page 37
13. ↑ Terex (NYSE: TEX) Form 10-K, FY 2007, "2007 compared with 2006" Page 38
14. ↑ Terex (NYSE: TEX) Form 10-K, FY 2007, "2007 compared with 2006" Page 38
15. ↑ Terex (NYSE: TEX) Form 10-K, FY 2007, "2007 compared with 2006" Page 39
16. ↑ Terex (NYSE: TEX) Form 10-K, FY 2007, "2007 compared with 2006" Page 39
17. ↑ Terex (NYSE: TEX) Form 10-K, FY 2007, "2007 compared with 2006" Page 35-38
18. ↑ Terex (NYSE: TEX) Form 10-K, FY 2007, "Results of Operations" Page 33-43
19. ↑ Terex (NYSE: TEX) Form 10-K, FY 2007, "Geographic Sales" Page F-14
20. ↑ Terex (NYSE: TEX) Form 10-K, FY 2007, "GENERAL" Page 4
21. ↑ Street Investing
22. ↑ Stanford University Research Site
23. ↑ Manitowoc's Fact Sheet
24. ↑ Kitco Metals
25. ↑ US Government Census Data
26. ↑ Terex (NYSE: TEX) Form 10-K, FY 2007, "2007 compared with 2006" Page 37
27. ↑ Manitowoc's Fact Sheet
28. ↑ Terex (NYSE: TEX) Form 10-K, FY 2007, "Business Strategy" Page 4-10
29. ↑ Terex Company Website
30. ↑ Terex (NYSE: TEX) Form 10-K, FY 2007, "Competition" Page 18
31. ↑ Terex (NYSE: TEX) Form 10-K, FY 2007, "Business Strategy" Page 4-10
32. ↑ Terex (NYSE: TEX) Form 10-K, FY 2007, "2007 compared with 2006" Page 36
33. ↑ Collection of Form 10-K, Fiscal Year 2007, for each company in the table
34. ↑ Freedonia Group
35. ↑ Freedonia Group
36. ↑ Freedonia Group