Terex Corp

Terex reported 8.5% revenue growth to $2.2 billion pro forma for its acquisition of REV Group (now specialty vehicles). Adjusted EBITDA margin of 12.0% compressed 20 basis points on shifting mix.

Why it matters: Terex boosted its revenue guidance 3% to $8 billion at the midpoint and EBITDA to just under $1 billion. The shares lost nearly 4% on the day July 30 likely due to business mix as Terex’s more resilient businesses delivered comparatively weaker performance. The aerials business grew nearly 10% but saw significant margin compression on tariffs. Management confirmed multiple parties are interested in acquiring the asset. The material processing business (also quite cyclical) grew nearly 10% with very impressive margins nearly 19%. Environmental solutions grew 6% on strong utility vehicle sales, but weak deliveries of refuse collection trucks affected margins by 250 basis points (17.5%). The specialty vehicles business grew 6% with healthy margin expansion despite investing in improving throughput in its fire truck business.

Long view: Terex has taken many corporate actions to transform itself into a niche provider of vocational vehicles, so investors likely didn’t appreciate the weakness in refuse collection. However, the company has strong bookings across the bulk of its portfolio, which bodes well for future growth. Furthermore, many of Terex’s customers are now municipalities with resilient demand and reliable funding, rendering concerns about those businesses overblown.

The bottom line: We are increasing our fair value estimate for narrow-moat Terex to $84 per share from $79 on its improved guidance.

Our $84 per-share fair value estimate equates to a price/earnings multiple of 17 times, which seems reasonable given several of the company's operating segments are under-earning.

The aerials segment is currently recovering from a cyclical downturn though tariffs and mix have affected profitability. We model 5% growth for the remainder of our forecast horizon, largely in line with management’s goals. We take a more conservative view on margin progression than management given our concerns about pricing power dynamics vis-à-vis Genie’s critical equipment rental customers. We anticipate peak margins of 12%, midcycle margins of 10%, and a blended average of 11%. We believe this gives management credit for enduring structural improvements in this segment.

For material processing, we forecast a 6% growth rate for the rest of our forecast horizon as the business is recovering from several down years, which is also supported by backlog growth. We agree that this business has historically more resilient margins, and we model a peak margin of 16% and midcycle margin of 15%.

For environmental solutions, we forecast blended average growth of nearly 6%, tapering to 5% at midcycle. Management has argued this business has the potential to grow at high-single-digit rates, though we are skeptical how enduring that is. We forecast 17% operating margins for our horizon out of conservatism and that the business is newly acquired. We do believe there is ample evidence of pricing power.

For newly acquired specialty vehicles (REV), we forecast blended average growth of 6%, tapering to 5% at midcycle. Management has argued this business has the potential to grow at high-single-digit rates, supported by a robust backlog. We forecast gradual operating margin expansion from 7% to 10% over the forecast horizon, consistent with management's guidance, though preliminary performance appears stronger than this.

Our Stage II forecast period incorporates an estimated investment rate of 15% and earnings before interest growth rate of 5% with perpetual growth of 3%. A 9.2% weighted average cost of capital derives from a market-average cost of equity and the firm’s current capital structure.

We assign a narrow Morningstar Economic Moat Rating for Terex based on intangible assets and switching costs. Management has divested its underperforming businesses and shifted its focus to three core segments: materials processing, environmental solutions, and specialty vehicles, having announced its intention to exit its aerial work platforms business. In our view, all three segments possess brand equity with customers as evidenced by number one or number two market shares across the bulk of its portfolios. Terex provides customers with reliable, high-quality products while offering them a lower total cost of ownership, which is supported by strong residual values. Terex also benefits from switching costs as Terex’s customers often maintain large fleets of its machines and vehicles (for example, a municipality and its fleet of refuse trucks). Furthermore, Terex has increased aftermarket sales to 20%-25% of the group’s sales, which implies an increasingly sticky customer relationship compared with the past.

Terex’s Genie brand in the aerial work platform segment is highly regarded among customers and the clear number 2 behind OshKosh’s JLG brand. Terex provides customers a full line of products, ranging from booms and scissor lifts to telehandlers. The Genie brand is a top-two brand globally (approximately 20%-25% globally and likely 5%-10% less share than JLG), due to its high-quality products, strong residual values, and deeply entrenched relationships with rental companies. The rental vertical is Terex’s main distribution channel for its products in the aerial work platform, or AWP, segment, accounting for approximately 90% of customers. High concentration in the rental vertical may seem unfavorable as renters typically sell multiple brands, but we believe Terex’s relationships with rental companies lead to a mutually beneficial partnership. Rental companies find value (profitability) in selling customers the strongest brands, such as Genie. For example, rental companies have benefited from selling Terex’s hybrid and electric-drive products. The rental industry is price competitive, but end users will pay for value. Terex’s electric-drive products reached cost parity with its combustion-engine products in late 2019, allowing end users to be more fuel efficient in their operations, lowering their total cost of ownership. We know the rental companies continue to gain market share, and Genie and JLG are among their most important supplier relationships. The relationship between customer and supplier is highly symbiotic. While aerial work platforms is the least profitable of Terex’s segments, the company is still essentially a duopoly supplier in the core North American market.

Terex’s technology-enabled aerial lifts improve safety and drive operational efficiency for customers, reducing total cost of ownership. The company’s aerial lifts allow customers to work at height safely in construction, industrial, utility, and residential markets. Terex’s booms are embedded with technology that prevents dangerous tip overs (a valuable feature). In addition to safety features, customers value the range of motion capabilities that Terex’s booms provide. Customers can reach low-access areas without having to constantly readjust their base positioning. Increased platform capacity is another selling point as more workers and equipment can be lifted. Together, these valuable product features give Terex a foundation to sell its booms at a higher price point, despite a competitive environment.

The company’s other brands are also market leaders across both the materials processing, environmental solutions, and specialty vehicles segments, serving a wide range of end markets. Terex’s materials processing brands serve crushing and screening (aggregates used in infrastructure construction), concrete, material and scrap handling, and environmental applications. The company offers customers a wide range of products, including jaw crushers, screens and feeders, in addition to washing systems. The company’s recently acquired environmental solutions group from Dover is a leading provider of refuse collection vehicles and related waste management services with operating margins near 20%. This segment also includes Terex’s utility truck and lift products owing to production synergies. The assets acquired from REV group include leading positions in municipal vehicles such as ambulances and fire trucks in addition to a strong consumer franchise in recreational vehicles. The company has number one or number two market positions across virtually all product categories with average market share of approximately 20%. We believe this illustrates that customers find value in Terex’s high-quality product offerings that enhance operational efficiency and therefore reduce total cost of ownership for customers.

Terex distributes its products through multiple channels, which consist of dealers (majority of activity), rental companies, and directly to end users. In addition to selling Terex’s products, dealers also provide customers with aftermarket parts and services to ensure their equipment operates efficiently and to limit machine downtime. Strong dealer networks typically create switching costs for customers, stemming from consistent parts availability and servicing capabilities. Terex offers quite customized solutions, customers maintain fleets, and independent dealer networks provide parts and services. These segments have consistently generated margins in the midteens and higher, reinforcing these themes.

Genie could gain further market share and realize more pricing power.

Environmental solutions structurally enhances the company’s growth and margin profile.

The company could make an acquisition into compelling new adjacencies.

The equipment rental companies (highly concentrated customers of the access segment) perpetually squeeze Genie’s margins.

The company has a history of doing value-destructive mergers and acquisitions.

Municipal customers push back on pricing, eroding some of Terex’s most lucrative profit pools.