Morningstar | Supply Chain Challenges Disrupt Terex's Otherwise Solid Performance
No-moat Terex missed consensus GAAP EPS by $0.22 as supply chain constraints hindered the crane segment’s operating performance. Despite this underperformance, overall revenue grew 11% year over year. While the magnitude of the miss is surprising, two of Terex’s three segments performed well. Materials processing, or MP, and aerial work platforms, or AWPs, saw year-over-year revenue gains of 13.6% and 13.9%, respectively, while cranes declined 0.2%. We feel the supply chain constraints are merely temporary and the shares are still undervalued. After incorporating this new information, we decreased our fair value estimate slightly to $42.50 from $43.00.Driven by strong demand in Asia and North America, the AWP segment performed well. Terex continues to innovate as new product introductions and enhancements are well received by customers. Backlog increased by 48% and operating margins were up 115 basis points during the quarter.
With a 72% increase in backlog, MP was the standout during the quarter. Once again MP expanded operating margins with a 210-basis point increase year over year. We expect this segment to perform extremely well into 2019.
Cranes continued to pose a problem for Terex as both revenue and operating margins were weak. Supply chain deficiencies hurt margins and revenue as production was demonstrably impacted. In the quarter, Terex was unable to deliver $30 million worth of equipment. Operating margins were down 430 basis points to negative 4.7%. We feel it may take a few quarters before cranes’ performance improves.
During the call, management revised 2018 EPS guidance, bringing it down to $2.60 to $2.70 from $2.80 to $3.00. Going forward, tariff-related materials inflation will continue to affect input costs. Terex intends to pass these costs on to its customers and has increased 2019 pricing accordingly. Management also provided some encouragement that supply chain issues are being addressed in a timely manner, which we feel is achievable.
Terex is a global manufacturer of aerial work platforms, materials processing machinery and cranes. The company has two segments: Aerial Work Platforms, which designs, manufactures, services and markets aerial work platform equipment, utility equipment, telehandlers and light towers, including portable material lifts, self-propelled articulating and telescopic booms, scissor lifts, and trailer-mounted light towers as well as, their related components and replacement parts; and Material Processing, which designs, manufactures and markets materials processing and other equipment, including crushers, washing systems, apron feeders, conveyors, and their related components and replacement parts.
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