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Morningstar | Terex Reports Strong Fourth Quarter With Upbeat 2019 Guidance; Sale of Demag Mobile Cranes Announced

After a week-long delay in Terex’s fourth-quarter earnings release, management announced it would be selling its underperforming Demag mobile crane business located in Germany to Japan-based Tadano. Despite this unexpected announcement, Terex had a strong quarter with its aerial work platforms and materials processing segments posting year-over-year revenue growth of 19% and 20%, respectively. In the fourth quarter, supply chain issues in the crane segment mostly abated, which enabled Terex to report quarterly revenue of $1.23 billion. That was up 16% year over year and beat consensus of $1.20 billion. Adjusted EPS of $0.51 also beat consensus of $0.47. Management’s upbeat 2019 guidance that included an EPS range of $3.60 to $4.20 was above our estimate of $3.55. While we question the need to sell Demag, we view the company’s core transformation efforts favorably and we are leaving our fair value estimate unchanged.

In addition to selling Demag, Terex announced it would be exiting its mobile crane business located in Oklahoma. This will leave Terex with its tower and rough terrain crane operations that will be reported with its corporate segment in the future and its utility products that will be included in its AWP segment reporting. The lack of a reportable crane segment, which had negative operating earnings in 2016 and 2017, leaves the question open about possible divestitures of the remaining crane businesses. As the Terex brand is associated with a variety of lifting equipment that it sells through its crane and AWP segments, we question what synergies it might be losing in the longer term through this latest move. Terex’s profitable materials processing segment has few commonalities with its lifting products that must maintain unique safety and performance standards, limiting any synergistic benefits from growing this segment.

Terex has a long history of acquisition and divestiture activity that has significantly changed the composition of the company over recent decades. This has contributed to a rather lackluster average operating margin of 3.4% between 2007 and 2017. Recent progress by management to streamline its sales and procurement efforts has led to an improvement operating margin, which reached 5.7% in 2018 and guidance calling for operating margin between 9% and 10% in 2019. Presumably, it will benefit from reduced drag created by its mobile crane operations. We question why management couldn’t improve the profitability of the cranes segment rather selling off the mobile part of the business. Our recent research suggests Chinese competitors like Sany have not made significant progress selling mobile cranes in North America. Yet, Terex does have the misfortune of needing to compete with an exceptionally strong, global leader, Liebherr based in Germany, which manufactures a full range of crane products. Terex's new segment reporting that omits cranes suggests Terex may exit its remaining crane businesses because competitive forces can’t be overcome through streamlining efforts.

Consistent with our thesis, Terex’s AWP segment is experiencing strong growth with backlog increasing 62% sequentially in the fourth quarter to $868 million. The segment continues to benefit from a tight labor market, which is driving adoption of aerial lift products as an alternative to scaffolding and ladders. Rental companies that dominate ownership of aerial lift products are experiencing increased rental rates and have decided to boost their capital expenditures. We believe that as end users have been forced to seek labor-saving aerial lift products during a robust economy and then, as a result, better understand the economics of using such products, they are likely to increase their use of aerial lifts in the longer term. This will benefit Terex throughout the economic cycle as end users seek cost savings measures as their margins are squeezed during an inevitable downturn in construction activity.