Terex Corporation

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

A global manufacturer of materials processing machinery and aerial work platforms, Terex operates in cyclical industries where their competitive advantages are subject to economic cycles.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Terex Corporation (TEX) is a global manufacturer of lifting and material processing products. Its business segments include Aerial Work Platforms (AWP), which includes telehandlers, and Materials Processing (MP), which encompasses a wide array of construction equipment, materials and metal processing, and recycling equipment.

The company operates in two primary segments:

  • Aerial Work Platforms (AWP): This division primarily sells equipment used for aerial construction, maintenance, and access tasks. The product range includes mobile elevating work platforms (MEWPs), telehandlers, and related parts and services. The AWP segment often faces the volatility of the construction industry, with demand influenced by macroeconomic factors and customer project cycles.

  • Material Processing (MP): This segment encompasses machinery for processing raw materials, including mobile and stationary crushing and screening systems. It caters to the construction, mining, quarrying, and recycling industries. This segment is also subject to the cyclical demands related to end-market activity.

Competitive Landscape

Terex operates in industries with a highly competitive landscape.

The construction equipment and machinery industry is characterized by numerous global and regional players, including established brands like Caterpillar, Liebherr, Komatsu, and smaller players. They compete on price, product performance, technology, and brand recognition.

  • AWP: Competitors in the aerial work platform segment include JLG Industries (Oshkosh), Genie (Terex itself), and Skyjack, among others. The industry is relatively consolidated with a few larger players holding significant market share.
  • MP: Competitors are diverse and vary greatly by the specific type of equipment, geographic region, and application. In the concrete and materials processing sector, Caterpillar, Metso, Sandvik, and Wirtgen are notable players. Competition is fierce, and the market is characterized by both global and niche competitors.

The global reach of these competitors, coupled with their varying economic and political environments, add further complexity to the company’s market position.

What Makes Terex Different

  • Diverse Product Portfolio: Terex has a wide range of products, from aerial work platforms to material processing machinery. This offers diversification within the cyclical machinery market.
  • Global Presence: They have a global presence, with manufacturing and distribution facilities spanning multiple continents. This gives them access to a wider customer base and reduces risks arising from geographical concentration.
  • Customer Relations: They emphasize building close customer relationships, enabling customized solutions and service, thereby increasing customer stickiness. However, the level of customization can potentially hurt scalability and create some challenges in future planning.

Financials

Let’s dig into the financial statements and see what it reveals.

  • Revenue: Revenues in Q3 2023, came in $1.3 billion, a 5% YoY increase and 20% sequentially, which is great for the company. They also showed higher year-over-year increase in both segments. This was mainly achieved through increased sales prices.
  • Profitability: The cost of revenues in Q3 2023 was 92.2% of revenues vs 90.5% of the previous year which is not ideal. However, the company was able to increase adjusted SG&A by 27% vs previous year, but the increase is only 12% sequentially. This was offset by their adjusted operating profits margin to 10.9% and adjusted EBITDA to 11.2% (an annual growth of 22%, despite the supply chain issues still ongoing). The company’s total revenues were at 53.5% from North America, 23.6% from Europe, and 23.1% from the rest of the world.

Overall, the company has improved profitability on the most recent financial statements, but these positive results could also be a result of macroeconomic forces that might not last. However, these results were achieved despite an increase in operating costs.

  • Balance Sheet: The company has a cash balance of $766 million and total debt of $1.19 billion. Inventory was at 1.685 billion, accounts receivable at 1.13 billion, and payables at $1.12 billion. The debt-to-equity ratio has significantly improved to 0.85 from 1.53 the year before. That is a great development.

Although the liquidity of the company has improved with good profits, they still need to work on reducing the debt in the long run, and their overall leverage is still quite high.

  • Cash Flows: The cash flow for operations has seen a big positive swing from negative ($385 million) to positive $85 million.
    • Free cash flow (after capex) has been $27 million vs -$418 million in the previous year. This is also another positive development.

The latest results showed a significant improvements on cash flow, both operating and free cash flow. In the previous year, they had negative cash flow from operations and a much bigger negative number for free cash flow, so that’s a big improvement.

Moat Assessment

Moat Rating: 2 / 5

Terex’s moat is weak due to the following:

  1. Cyclical Industry: The company operates in cyclical industries, making its performance highly dependent on economic conditions. Its financial performance is thus very volatile. It is unable to produce consistent cash flows through periods of economic downturns, which makes the company less valuable.
  2. Competition: The industry is highly competitive with many established players and intense pricing pressure.
  3. Limited Differentiation: The company faces a lot of competition and provides products that are not differentiated much. While they have a large portfolio, it is not considered unique by any means. They do have strong brands, however, that should offer them some protection against smaller peers, but not against the major players in the industry.
  • Intangible Assets (Brands): Terex has established some brand recognition. It also owns some premium brands such as Terex, Genie, and Powerscreen, however, a large portion of the revenues come from OEM manufacturing that are not under the aforementioned brands, so their branding is also not consistent. Brands do have good pricing power and are important, especially on the aerial work platform side. But their influence seems to be regional and product category specific and not universal, thus making their overall value limited.
  • Customer Switching Costs: They do have some elements of customer switching costs due to the specialized nature of their offerings that make it inconvenient or difficult for customers to switch suppliers often. But given the large number of players in the industry, these switching costs are not strong enough to give them unique pricing power.
  • Cost Advantages: They do not have a cost advantage. There are large multinational companies, and the commodity nature of the business does not enable significant advantages over others in the long run.

Risk Assessment

  • Cyclical Demand: The company’s performance is highly dependent on demand from construction, mining, and infrastructure markets, which are cyclical. This means that economic downturns can severely affect revenue and profitability.
  • Competition: The competitive nature of the industries they operate in exerts constant downward pressure on profit margins.
  • Raw Material Costs: Fluctuations in the prices of steel, aluminum, and other raw materials can impact profitability. Supply chain issues can also create disruptions and cost increases. They did note in the earnings call that supply chain issues are improving slowly, but are still an ongoing risk.
  • Customer Concentration: Some customers may represent a significant portion of their sales, making the company vulnerable to loss of large accounts.
  • Debt Burden: Their current total debt of more than $1 billion is significant. The company has made meaningful progress to reduce leverage, but will remain sensitive to interest rate changes.
  • Technological Disruptions: New technologies and product innovation can render existing products obsolete. The company must be able to stay on the cutting edge to avoid their products becoming obsolete.

Business Resilience

Terex demonstrates average resilience. They do have a good brand reputation in many areas, and a global presence, however, they are in a cyclical and competitive industry. This implies that the company might have difficulties keeping their profits and stock prices from plummeting, in periods of economic downturns. They have also been making efforts to make their business more sustainable by paying close attention to the underlying businesses.

Understandability

Understandability: 3 / 5

Their business is not too complex, however, requires a good understanding of heavy-machinery industries. For some, it would be easy to understand, while for others it might be more difficult, thus earning a 3/5 rating.

Balance Sheet Health

Balance Sheet Health: 3 / 5

  • Debt Levels: The total debt of more than $1 billion is considerable. They need to continue to reduce debt to be considered a company with a strong balance sheet, but their progress over the past few years is encouraging.
  • Cash Flows: The cash flow from operations and free cash flow have been volatile in the past. However, the latest results signal that their position is improving greatly.
  • Liquidity: They have over $700 million in cash currently, giving them a significant liquidity buffer. This is positive for future planning and expansion.
  • Assets: The current assets are relatively high at approximately $3 billion while total assets are $5.4 billion, which is quite good. But a large portion of assets are made of tangible assets (that could fall in value), meaning their net value is very sensitive to market and business trends.

Conclusion

Terex is a global manufacturer with a wide range of products, operating in cyclical and competitive markets. Although they have improved their financial position, their weak moat makes them a risky investment. Their business also has high revenue dependency on specific sectors such as construction, mining, etc., that are also cyclical.

You should be cautious when considering adding Terex to your portfolio. There are certain positive changes that are slowly making their business more durable, but it is still a long and hard road ahead.