IB Net Payout Yields Model

Terex Shows Some Potential for Growth

You won't hear that in the media reports tomorrow. It'll all be about a larger loss then expected (more on that later) or blah blah this and that. In reality, Terex (TEX) continues to work through a deep and devastating recession in the heavy equipment market. One that has completely crushed end markets as revenues were down some 50% from the 2008 levels of $8.5B. At the end of the press release though, TEX provided a nice little nugget regarding revenue.

Revenue is expected to grow 25% next year to hit $5B partially because of adding the port equipment but a lot because of a return to growth.

As far as 'missing' the estimates I mentioned earlier, we've already got a Reuters report talking about how they missed estimates. Reuters is quoting the same numbers on Yahoo! Finance that clearly haven't been updated for the sale of the mining division. The revenue for 2009 is in line with the estimates given after the sale of the mining division and actually tops the lower end estimates (or clearly the analysts that updated for the discountinued operations). In addition, the $5B estimate for 2010 even surpasses the average estimate even considering that some estimates still likely include the mining division and some of the low end estimates were $3.6B. Clearly some analysts won't be disappointed.

This disparity of estimates further enforces why you've got to do your homework and not rely on the headlines. Its amazing that even with the importance of earnings, Thompson Reuters still doesn't ensure the fine tuning of their numbers. Clearly the $1.2B revenue estimate for Q4 contains several bogus estimates that should be thrown out or forced to be updated. For that reason, the beat or miss aspect of earnings reports tend to be skewed. In most cases, it really helps to have an updated report from a respectable analyst. Otherwise, you'll get a distorted view of expectations.

Highlights from the press release:
  • Net sales were $1,058.0 million in the fourth quarter of 2009, a decrease of 36.1% from $1,656.1 million in the fourth quarter of 2008. (all results exclude the Mining equipment division sold to Bucyrus)
  • “The 2010 outlook remains challenging for Terex, but we believe that our performance will improve during the year. We have begun the process of changing our focus from cash management to growth. We see relative stability in our end markets and believe we need to capture market share in order to grow. To do this, we will introduce several new products across a range of our businesses and complete new factories in India and China that will support our business later in 2010 and beyond. We expect to continue to incur operating losses in the first half of 2010, and expect to return to operational profitability in the second half of the year. Additionally, we anticipate that our income from operations in the fourth quarter of 2010 will more than offset our interest expense for that period.
  • “The fourth quarter of 2009 ended with the Company trending back into equilibrium between production and end market demand,” commented Tom Riordan, Terex President and Chief Operating Officer. “During 2009 we produced less than end market demand, as evidenced by our significant inventory reduction, which contributed to increased underabsorption in our factories,” continued Mr. Riordan. “Producing to end-market demand in 2010 will contribute almost $200 million to operating profit improvement. We do not expect our businesses to show signs of growth until later in the year.(So crucial from an operating framework. Margins should improve now that production matches orders and as capacity utilization improves. Also highlights why steel demand will increase in 2010)
  • We expect that Materials Processing (MP) will begin to see improvement first and compact construction will follow, starting in North America. Aerial Work Platforms (AWP) will likely remain at current levels for most of the year and pick up in early 2011. Cranes should start to experience moderate growth in the back half of the year, including the Port Equipment business. We also expect meaningful cost reduction contributions from our supply chain initiatives.” (finally signs of improved numbers. Street will latch onto improving numbers)
  • Our operational attention has shifted from a focus primarily on cash generation in 2009 to growth and profit generation in 2010, as our markets have stabilized, albeit at low levels,” concluded Mr. Riordan. (interesting how he uses the word stabilized, but for the most part of the details they talk about actual growth)
  • Based on what we see today, our current outlook for net sales in 2010 is approximately $5.0 billion, an increase of roughly 24% from 2009. (Uh, 24% growth doesn't sound like just stable markets. Earnings are better then the low end number that we know is likely more accurate.)
  • Backlog for orders deliverable during the next twelve months was $1,300.4 million at December 31, 2009, a decrease of 46% from December 31, 2008, but basically unchanged from September 30, 2009. The AWP, Construction and MP segments experienced modest growth in backlog as compared to levels at September 30, 2009, although off a low base. The Cranes segment backlog declined modestly as compared to levels at September 30, 2009. Consistent with recent quarters, the majority of our backlog is comprised of orders in the Cranes segment. (Encouraging to see stability in orders and actual growth in most sectors. Also, whats up with the modest growth considering the 3 divisions were all basically over 10% backlog growth?)
  • AWP segment backlog decreased 8.0% as compared to December 31, 2008, while increasing 13.1% as compared to September 30, 2009
  • Construction segment backlog decreased 55.6% versus the comparable prior year period, but increased 9.6% as compared to September 30, 2009.
  • MP segment backlog increased 38.0% versus December 31, 2008, and increased 49.2% as compared to September 30, 2009
Backlog is showing some nice trends. Cranes continue to decline buy the other sectors look very solid especially with YOY gains from MP. Now that the businuess has finally stabilized maybe TEX management is being a tad gun shy on declaring the return to growth. Even there own numbers suggest 25% revenue growth in 2010 yet they mainly focus on stable markets. Numbers just don't jive. International growth is going to lead to some blockbuster years probably as early as 2011 as the replacement of old equipment can't be delayed any further. By then, all of these cost cutting efforts should lead to some impressive margins. This stock won't remain down nearly 80% from its pre recession highs that much longer. Especially with TEX forecasting $6 earnings potential as early as 2013 per the last persentation.

LEAPS on TEX look appealing. The comment from Sham Gad basically backs our current thesis on this stock. Those calls have now dropped to $2.30 and might drop further at the open tomorrow offering a nice time to pick them up. The 25s might be more attractive.

Today (published 1/19), there are still some names worth considering for January 2012 LEAPS. One I particularly like is the January 2012 $30 calls on construction equipment company Terex (NYSE:TEX). Terex shares trade at $23 and the company is currently still in the midst of brutal cyclical downturn. The company recently sold its mining business and is in the middle of repositioning the business. Terex gets a majority of its revenues overseas and will do quite well when the construction cycle improves. Should that happen in next two years - a very likely possibility - shares will be much higher then. The Jan 12 $30 calls will cost you $4.20 today. If shares are above $34.20 anytime in the next two years, the LEAPS will be profitable.

Disclosure: Long TEX in client and personal accounts. Looking to add LEAPS on a pullback.


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