Terex Corporation: Why This Contrarian Industrial Play Can Jump 67%

Terex Corporation: Why This Contrarian Industrial Play Can Jump 67%
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Terex Stock: A Contrarian Industrial Play for the Long-Term Investor

It often makes sense to add stocks on price weakness rather than buy them at higher price levels. This strategy doesn’t always pan out, but when it does, the potential gains can be enormous for patient long-term investors.

Take the case of small-cap industrial play Terex Corporation (NYSE:TEX), a manufacturer of mechanical lifting and material processing products and services used in a broad mix of industrial applications.

The company is involved in construction, energy, infrastructure, manufacturing, mining, quarrying, refining, shipping, transportation, and utilities.

If you are looking for exciting next-generation technologies, Terex is not the company, but if you are looking for a contrarian turnaround opportunity, read on.

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TEX stock is down 36% over the past year and down 38% from its 52-week high.

The one-year chart of Terex stock displays the selling from the $40.00 level in October 2018, which was followed by a V-shaped rally prior to a subsequent decline.

Chart courtesy of StockCharts.com

The TEX stock price failed to hold as the company looks to turn things around in a tough macro environment dominated by trade and tariff issues.

Terex stock may be setting up for a major bullish double bottom. A rally back toward $40.00 implies a gain of more than 60%.

My Bullish Fundamental Thesis for TEX Stock

Terex Corporation’s revenues fell from 2015 to 2017, prior to rebounding in 2018. Trading at 0.33 times trailing sales is attractive.

Fiscal Year Revenues (Billions) Growth
2014 $7.3
2015 $5.0 -31.3%
2016 $4.4 -11.5%
2017 $4.4 -1.8%
2018 $5.1 17.5%

(Source: “Terex Corp.MarketWatch, last accessed October 10, 2019.)

Terex will need to work to turn around its expected revenue decline of 10.3% to $4.6 billion this year, followed by a decline of 3.8% to $4.4 billion in 2020. (Source: “Terex Corporation (TEX),” Yahoo! Finance, last accessed October 10, 2019.)

The company has been producing positive earnings before interest, taxes, depreciation, and amortization (EBITDA), but it reported declines in EBITDA from 2016 to 2017 before reporting a big jump in 2018.

Fiscal Year EBITDA (Millions) Growth
2014 $626.0
2015 $455.0 -27.3%
2016 $309.5 -32%
2017 $232.1 -25%
2018 $366.6 58%

(Source: MarketWatch, op. cit.)

As far as generally accepted accounting principles (GAAP) earnings per share (EPS) go, Terex generated profits in four of the last five years.

Fiscal Year GAAP Diluted EPS Growth
2014 $2.28
2015 $1.30 -43%
2016 -1.66 -228%
2017 $0.63 138%
2018 $1.45 129%

(Source: MarketWatch, op. cit.)

On an adjusted basis, Terex earned $2.71 per diluted share in 2018, compared to $1.35 in 2017. (Source: Yahoo! Finance, op. cit)

A plus is that, while revenues are expected to contract, TEX is estimated to ramp up its adjusted earnings to $3.55 per diluted share this year and $3.35 per diluted share in 2020.

Terex delivered positive free cash flow in four straight years, prior to reporting a negative reading in 2018.

Fiscal Year Free Cash Flow (Millions) Growth
2014 $329.2
2015 $109.1 -66.9%
2016 $294.0 169.5%
2017 $109.5 -62.8%
2018 -$9.6 -108.8%

(Source: MarketWatch, op. cit.)

Analyst Take

While the expected revenue contraction for Terex Corporation is an issue, its earnings are expected to rise, which is a bullish sign for TEX stock.

The company’s five-year compound annual growth rate (CAGR) for earnings is expected to rise to 9.3%, compared to 3.4% during the past five years.

TEX stock trades at an attractive 7.1 times its 2020 EPS and it has a cheap price/earnings to growth (PEG) ratio of 0.7. The low valuation offers some support for Terex stock.