Monday, December 21, 2009

Can Terex Focus Its Way to Huge Profits?

Terex is one of the largest builders of Construction and Mining equipment in the world. Late Sunday night they announced a deal to sell their mining equipment business to Bucyrus (BUCY). According to management, this deal for $1.3B in cash (or potentially $300M in BUCY stock) allows for TEX to focus on the Crane, Aerial Work Platform, Construction, and Materials Processing sectors. It also provides TEX with much needed liquidity in this liquidity strained market.

The deal transfers about 20% in sales or roughly $1B from 2009 totals, but only 15% of sales back in the boom times of 2008. The mining segment was also requiring over 20% of working capital expenditures even though in normal times it doesn't produce more then 15% of revenues.

On the Conference Call this morning to discuss the deal, the CEO announced that TEX has a goal to double revenues to roughly the $8B level and EPS to $6 by 2013. Impressive numbers for a $20 stock with a $2.2B market cap if they can achieve those numbers. This is all before redeploying the $1.3B in cash whether via paying down debt or buying other business lines trading at huge discounts. Remember TEX had $9.9B in sales in 2008 or $8.5B excluding the product lines sold so reaching back to $8B isn't much of a stretch. We'd actually look for $10B assuming around $500M contributed from acquisitions from some of the cash they just got.

Suddenly the future of this stock seems very bright. TEX now has the cash to wait for markets to turn or take advantage of other cash strapped businesses. With the infrastructure boom set to continue all over the emerging world, TEX should be a winner and now trades at a ridiculous Enterprise Value of .5x to revenue.

Some highlights from Reuters:

  • The unit being sold, which includes hydraulic mining excavators and electric drive mining trucks, has 38 facilities around the world with approximately 2,150 employees.

    Terex will redeploy the capital from the sale within its existing businesses, as it focuses on its crane, construction equipment and aerial work platform businesses. It said the mining business would have required substantial investment in order to grow, including in its distribution network, which Bucyrus already has in place.

    "This is one of those unusual circumstances where this transaction is a win-win for both companies," Terex Chief Executive Ron DeFeo said on a conference call. "The potential to double our business exists by 2013, and that is what we're targeting."

    Terex, said it aimed to double its net sales by 2013 and could reach earnings of $6 per share even without doing acquisitions. Sales totaled $9.9 billion last year and $3.9 billion in 2009 so far.

    The mining segment accounted for about 15 percent of Terex's 2008 sales and 23 percent of its operating profit, according to presentation materials. But Terex said mining accounted for a higher percentage of its working capital over the past five years.


TEX has been a large holding of our Growth Portfolio for a while and we fully expect them to return to much higher levels. Maybe not the $90+ level of mid 2007, but clearly TEXs stock price still remains one of the most impacted since the crisis and that could change real soon.

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