When Size Becomes an Issue
Terex is a global manufacturer of equipment for construction, infrastructure, quarrying, mining, shipping, transportation, refining, energy, utility, and manufacturing industry. Its customers are private companies and public institutions, civil and military. Prospects have improved through the last quarter due to debt repayment, positive expectations about the Aerial Work Platform, restructuring initiatives, and expected growth at developing markets.
Besides being a global company, Terex is a small company when compare to industry peers. When compared by market cap, the firm is almost 20 times smaller than Caterpillar. Hence, a troubled European region, additional pricing pressure from competitors, slow recovery of the construction sector, and adverse currency fluctuations can add up to unbearable financial stress. Additionally, integration of recently acquired Demag Cranes is already putting to work the company’s cash flow.
So far this year, only the Aerial Work Platform displayed positive growth indicators. The construction equipment and material handling & port solutions are not expected to deliver any meaningful growth during the upcoming quarters. Hence, management continues to drive away from the mentioned segments and increment AWP´s revenue contribution. The new business strategy will be supported by cost cutting policies. True growth however, analysts argue, will come from end-market expansion. Although organic growth is always a good sign, the firm is already stretch too thin to match competitor´s service network.
Financially, Terex is moderate due to an irregular overall performance. Currently trading at 95.2 times its trailing earnings, the stock carries a 700% premium to the industry average. Nine gurus have completed transactions over the past quarter, and five have sold out their positions completely. The largest guru holding stock is Alan Fournier who reduced his position by 5% after a year of inactivity. I share their pessimism concerning Terex due to its moderate finances and expected headwinds.
When Merging Becomes an Obsession
CNH Industrial is the result of the merger done by CNH Global Fiat Industrial. For starters, some savings are expected to come the way of the new firm without granting the firm a clear competitive advantage. From now on, the company is a tripod with an agricultural, a construction, and truck leg. Although they are not independent of each other, their prospects vary due to the particularities of each industry. At the present, the agricultural segment is expected to lag behind the other two due to declining farm revenue and difficult comparisons.
The truck and construction segment are expected to drive CNH Industrial´s growth on the back of a recovering European economy and rising non-residential construction in the US, correspondingly. Since these two segments account for 35% of total revenues and offer smaller margins, their positive performance is expected to be offset by a lagging agricultural segment in the short-term.
Prospects for the Iveco truck, marketed in Europe and Latin America, does not hold a market leading position. Daimler and Volkswagen lead most markets where the Iveco truck is present, offering a higher quality product, with considerable wider margins. Opposite, the construction segment has been able to carve out a niche in the compact equipment class, but performance has been irregular. In this segment, the new created firm has the challenge of optimizing facility utilization.
Financially, CNH Industrial is moderate but an eye should be kept on debt and margins. Currently trading at 11.49 times its forward earnings, the stock is fairly priced. Also, guru Mason Hawkings recently bought over 30 million shares of common stock, but I do not share his optimism. My pessimism is founded on the history for merging the company holds, and its incapacity to deliver real growth. Last, with a bogged down agricultural segment is hard to see any real growth in the short term.
Should I find myself in the position to choose between one of these companies, I would choose CNH Industrial. Its brand recognition, global presence, and extent distribution network are strong arguments to support a long-term investment. Additionally, I do not expect farm revenue to decline considerably, and while total savings will be notable. Last, even though Iveco is not a market leader, it is a more competitive product for developing markets than Daimler and Volkwagen’s.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.