Waiting for the Earth to Move Again

02/12/2009 12:17 pm EST


George Putnam

Editor, The Turnaround Letter

George Putnam IV, editor of The Turnaround Letter, finds a beaten-down manufacturer he thinks will bounce back nicely when the global economy recovers.

Terex (NYSE: TEX) is a leading manufacturer of heavy equipment, including cranes, earth-moving and road-building machinery, and mining equipment. The company rode the global boom in construction, energy development, and mining for much of the past decade, pushing the stock as high as $96 in July 2007.

However, as construction has stalled and falling commodity prices have slowed global mining activities, investors have lost faith in the stock, dropping it to the teens in recent months. (It closed below $14 Wednesday, but was sharply lower in after-hours trading after reporting a 20% sales decline and a net loss of $4.46 a share in the fourth quarter, after writing down goodwill by $459.9 million—Editor.)

[But] the company is well positioned to grow again when the worldwide economy recovers. Its products are essential to many crucial sectors such as natural resource development, residential and commercial construction, and infrastructure creation. It is well diversified, both in the products it offers and the geographic markets it serves. For example, 65% of its sales come from outside the US and Canada, with about 24% coming from the developing countries.

Moreover, Terex is a market leader in most of its product categories, with about three- quarters of its sales coming from market segments where it is the number one, two, or three player. Terex has a strong management team led by Ronald DeFeo, who has guided the company to more than a decade of strong growth.

Terex is taking prudent steps to weather the current downturn. It is reducing headcount across its divisions, and it is temporarily idling some factories and closing others. In addition, it is consolidating two divisions to improve marketing and reduce costs. The company has the financial wherewithal to maintain its position even if the global slowdown is protracted. The balance sheet is solid, with a reasonable debt level buttressed by nearly $500 million in cash.

Not only is Terex well-situated to capitalize when global growth picks up again, but it could get an early boost from Washington. President Obama has pledged to spend billions of dollars to rebuild America’s crumbling infrastructure, and much of that rebuilding effort will use Terex equipment.

Some patience may be required before myopic mainstream investors once again recognize Terex’s long-term potential, but when they do return to the stock, it will appreciate smartly—and probably for many years to come. We recommend buying Terex up to $25.

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