Reason 1. Increase in infrastructure costs

Terex manufactures large equipment for infrastructure needs. Terex products are divided into two product lines: Materials Processing (MP) and Aerial Work Platforms (AWP).

Terex business segments by product; source: presentation

In the Materials Processing segment, the company manufactures a wide range of construction equipment including crushers, cranes, concrete pavers, etc. This segment accounted for 43.23% of revenue in 2023. The Aerial Work Platforms segment mainly manufactures material handling and utility equipment. This segment accounted for 56.72% of the company's revenue in 2023.

Currently, North America is witnessing an increase in demand for infrastructure equipment due to higher investments in infrastructure. This is due to major initiatives by the US government as well as the so-called megatrends of economic transformation.

The Infrastructure Investment and Jobs Act, passed in 2021, is the key measure that has expanded infrastructure investment and created a megatrend for years to come. The Act provides for the allocation of $550 billion, in addition to the $650 billion already budgeted earlier, to upgrade and improve infrastructure to create additional jobs and revitalize the US economy. The total amount of planned expenditures is $1.2 trillion, which will be used over 10 years.

Infrastructure Investment and Jobs Act expenditure structure; source: compiled by author

The infrastructure spending laid out in the act involves massive capital construction that is not possible without heavy equipment, which has increased the demand for it.

The Inflation Reduction Act of 2022 was the second major piece of legislation to authorize significant infrastructure spending in the US. It provides more than $400 billion in energy spending to reduce the US economy's dependence on fossil fuels and accelerate the transition to a low-carbon future. It is important to note, however, that unlike the Infrastructure Investment and Jobs Act, implementation of the Inflation Reduction Act has been somewhat delayed. In 2023, the regulatory framework on which the Act's provisions would be implemented was being put in place, so the active phase of budget expenditure began in 2024. Thus, the effect of the Act began to be reflected in Terex' business in the current year.

Another major piece of infrastructure investment legislation was the Chips Act of 2022. While at first glance it may appear to have more to do with research and development, in reality the majority of its $39 billion investment is in the construction of semiconductor manufacturing plants in the US. As such, the law is also directly related to demand for Terex products.

During the Q1 2024 investor conference call, Terex management noted that more than 80% of the company's target market is currently driven by megatrends and infrastructure laws. Thanks to them, production construction has increased by 30% in the last year alone, according to the company's estimates.

At the same time, against the backdrop of high interest rates in the US economy, it was the industrial sector that became the main driver of construction growth. Despite unprecedented infrastructure spending, cement consumption in the US fell by 2.8% in 2023, driven by a decline in residential construction. In contrast, non-residential construction increased by 19.8% and investment in building structures added 13.2% through 2023.

The latest positive data on US inflation, which showed a faster slowdown, as well as the dovish rhetoric of Fed Chairman Jerome Powell indicate that the regulator may move to reduce the discount rate in the fall of 2024, and may do so more than once this year. According to Bloomberg, bond traders have started to include this scenario in their calculations.

Obviously, if monetary policy is liberalized in the US, mortgages will become more affordable and refinancing will become profitable, which will positively affect the dynamics of housing construction.

Thus, there are several laws currently in place in the US that provide for large infrastructure spending over the next few years. In addition, the anticipated liberalization of monetary policy by the US Fed may lead to an increase in housing construction as early as H2 2024. These factors will inevitably drive demand for heavy equipment needed for construction, material handling, concrete pouring and other building needs. Terex looks to be a clear beneficiary of these trends.

Reason 2. Increased backlog and orders

Infrastructure laws enacted in the US from 2021 have led to a significant increase in demand for heavy equipment. This, combined with the negative impact of the coronavirus pandemic in terms of disruption to the supply chain, has resulted in a significant increase in Terex' order backlog.

The chart below shows that the company's order backlog in Q1 2022 and 2023 was at very high levels, almost three times the historical average for the quarter.

Company backlog dynamics; source: presentation

During a recent teleconference, the company noted that the backlog decline in Q1 2024 was not due to a reduction in business. On the contrary, the backlog decrease was due to improvements in supply chain and labor productivity, which resulted in faster order fulfillment. At the same time, the order backlog remains well above historical levels, ensuring that the company remains in a position to convert accumulated orders into higher sales growth.

The situation is similar for Terex' new orders. The graph below shows a decline in orders in Q1 2024, due to the return of seasonality to the Terex business after a period of exceptional order growth driven by infrastructure legislation.

Dynamics of the company's new orders; source: presentation

However, during the Q1 2024 investor conference call, the company's management noted that demand for machinery remains strong in North America, and therefore Terex has slightly raised its financial results forecast for 2024. Due to this, as well as lower orders in Q1 2024 due to seasonality, we can expect an increase in orders in Q2 2024. In our view, these expectations are the reason for the recent surge in Terex stock prices.

One of the drivers of further growth in orders and sales remains the development and launch of new products. These include, for example, the Bison 170 jaw crusher, which can be powered by both diesel and electricity, and a new version of the I-120RS horizontal crusher for quarry mining, which will now also be available with an electric motor. As Terex management noted during the teleconference, approximately 20% of the company's revenues are now generated from sales of products that have been launched in the last three years, confirming the importance of the company's new developments for revenue growth.

During a recent teleconference, management reaffirmed its commitment to achieving its long-term revenue and operating profit margin targets. Thus, the company's revenues are expected to exceed $6 billion by 2027, which implies a compound annual growth rate (CAGR) of 7% through the end of the forecast period. Terex estimates that operating profit margins will increase to 13%–14%. The company is already close to achieving this target, having reached 12.2% in Q1 2024.

Terex medium-term financial targets; source: presentation

In summary, the company's performance, namely the increased backlog and normalized new order intake, demonstrates Terex' ability to achieve its long-term growth targets ahead of schedule, which would contribute to the company's shareholder value.

Reason 3. Increase in capital returned to shareholders

During the Q1 2024 results teleconference, Terex management noted that the company is passing peak capital expenditure (CAPEX) in the current investment cycle. As a result, CAPEX will soon start to decline, which could lead to dividend growth and a reinvigorated share buyback program.

Terex currently provides its shareholders with a dividend yield of 1.18%. As you can see from the chart below, the company is committed to increasing the payout on a regular basis.

Dividend yield on Terex shares; source: WSZ

In addition, Terex has an unlimited share buyback program. At the end of Q1 2024, the authorized amount of the program was approximately $129 million, or 3.32% of the company's market capitalization.

Thus, a potential increase in the rate of capital returned to shareholders could also help drive the share price up.

Financial performance

Terex' financial results for the trailing 12 months (TTM) can be summarized as follows:

Revenues totaled $5.21 billion, up 1.10% from 2023.
Adj. EBITDA increased from $0.69 billion to $0.70 billion. Adj. margin rose from 13.41% to 13.52%.
Net income was $0.51 billion compared to $0.52 billion at the end of last year.

The increase in revenue and operating income was primarily driven by higher demand for the company's products, primarily in North America, which also favorably impacted Terex' results for Q1 2024.

Dynamics of the company's financial results; source: compiled by author

Terex' results for the first three months of 2024 are summarized below:

Revenue rose 4.60% year-over-year (YoY) to $1.29 billion.
Adj. EBITDA increased from $159.30 million to $172.70 million.
Net income was $108.60 million, compared with $112.60 million a year earlier.

Dynamics of the company's financial results for the first three months of 2024; source: compiled by author

In the past 12 months, operating cash flow decreased to $416.30 million versus $459.30 million at the end of 2023.
Free cash flow decreased from $365.70 million to $307.40 million TTM.

It is worth noting that Terex' business is subject to seasonality, which has historically resulted in weak or negative cash flows in Q1. At the same time, seasonality had a stronger impact on the company's business in 2024 than in the previous two years. The decrease in operating and free cash flows over the past 12 months is mainly due to lower working capital as well as higher capital expenditures.

Company cash flow; source: compiled by author

Terex' balance sheet can be characterized as healthy:

Total debt is $724.10 million.
Cash equivalents account for $364.90 million.
The net debt to adj. LTM EBITDA ratio is 0.5x.
The interest expense coverage ratio is 10.6x.

This level of debt load indicates excellent financial stability of the company.

Terex expects a moderate trend in financial results through 2024.

Company forecast of financial results; source: compiled by author

It is worth noting that the company has maintained or improved its expectations (e.g. sales target) at the last forecast revision, which gives confidence in the management's competence and the company's value growth potential.

Stock valuation

Terex is trading at a discount to the industry average with EV/Sales at 0.82x, EV/EBITDA at 6.07x, P/E at 7.83x and Fwd P/E at 8.58x.

Comparable estimate; source: compiled by author

The average price target from the top-8 Wall Street investment banks is $60.6 per share. According to our consensus, the company is undervalued by industry average multiples; the stock’s fair market value is $80, which implies a potential upside of 27.7%.

Price targets of investment banks; source: compiled by author

Key risks

Slowdown in infrastructure spending. Terex' business is highly dependent on the implementation of US infrastructure investment legislation. A change in government policy in this regard and a reduction in related investment could slow the growth of the company's business.
Failure to identify additional growth drivers. On the Q1 2024 earnings call, Terex management stated that it was considering M&A to accelerate growth, which was welcomed by investors. However, if the company fails to find attractive areas for new investment, this could lead to a shareholder backlash.
Lack of positive order momentum. Judging by the momentum in Terex' share price, investors expect the company's order backlog to increase significantly by the end of Q2 2024. If this does not happen, it could lead to a negative investor reaction and a decline in Terex' market capitalisation.

* This investment idea is provided to you as part of the additional service "Investment Research and Financial Analysis" in accordance with license 275/15.

打印文件，签署后上传已签署文件的扫描件至网站

请仔细核对您的所有数据