Strong Demand and Improving Supply Chains Should Bolster Terex in the Near Term

Equity Analyst

Dawit Woldemariam

Terex provides customers an extensive product portfolio consisting of aerial lifts and materials processing equipment. We believe Terex will continue to be one of the top companies in the heavy equipment industry, with strong brands that resonate with users across construction, industrial, utility, mining, and residential markets. Customers value Terex’s high-quality and strong-performing products, which also have good residual values. Terex also helps customers reduce their total cost of ownership through improved operational and fuel efficiency, limited machine down-time, and consistent parts availability. 

The company’s strategy shifted in late 2015, when it repositioned its operations around two core segments, aerial work platforms and materials processing equipment and divested its unprofitable construction equipment, material handling and port solutions, and mobile cranes businesses. We believe the company is on much better footing today, as its two core segments are market leaders in their respective industries. In aerial lifts, its Genie brand is highly regarded and offers customers a full line of products, including booms, scissor lifts, and telehandlers. The Genie brand also provides customers with valuable product features, such as safety, accessibility, and capacity, allowing Terex to achieve better pricing. In our view, the materials processing business is well-positioned to compete with peers, but we think management will need to continue improving its aftermarket offering, given it services a small percentage of the current installed base. 

Terex has exposure to end markets that have attractive tailwinds. For example, we think the $1.2 trillion U.S. infrastructure deal will lead to increased aggregates consumption and drive demand for Terex’s materials processing equipment. Additionally, we expect nonresidential construction spending to recover from pandemic lows, serving as a tailwind for the aerial lift business.

Business Strategy & Outlook

We upgrade our economic moat rating for Terex to narrow from none. Over the past few years, management has divested its underperforming businesses and shifted its focus to two core segments, aerial work platforms and materials processing. In our view, both segments possess brand equity with customers. Terex provides reliable, high-quality products and offers customers a lower total cost of ownership thanks to its strong residual values. These factors lead us to assign Terex a narrow economic rating, underpinned by intangible assets. While switching costs are common among the large equipment manufacturers we cover, we think Terex’s switching costs are modest. We believe the company will need to continue building up its aftermarket business in order to service a higher percentage of the current installed base. Aftermarket revenue as a percentage of total revenue is likely in the midteens today, up from 10%-12% historically, and we’d like to see this figure get closer to the other large equipment manufacturers we cover, typically around 20% of total revenue.

Terex’s Genie brand in the aerial work platform segment is highly regarded among customers. Terex provides customers a full line of products, from booms and scissor lifts to telehandlers. The Genie brand is a top-two brand globally, due to its high-quality products, strong residual values, and deeply entrenched relationships with rental companies. The rental vertical is Terex’s main distribution channel for its products in the aerial work platform segment, accounting for approximately 90% of customers. High rental concentration may seem unfavorable, as renters typically sell multiple brands, but we believe Terex’s relationships with rental companies leads to a mutually beneficial partnership. Rental companies find value (profitability) in selling customers the strongest brands, such as Genie. For example, rental companies have benefited from selling Terex’s hybrid and electric-drive products. The rental industry is price-competitive, but users will pay for value. Terex’s electric-drive products reached cost parity with its combustion engine products in late 2019, allowing users to be more fuel-efficient in their operations, lowering total cost of ownership. 

Terex’s technology-enabled aerial lifts improve safety and drive operational efficiency for customers. The company’s aerial lifts allow customers to work at height safely in construction, industrial, utility, and residential markets. Terex’s booms are embedded with technology that prevents dangerous tip-overs (a valuable feature). In addition to safety features, customers value the range of motion capabilities that Terex’s booms provide. Customers can reach low-access areas without having to constantly readjust their base positioning. Increased platform capacity is another selling point as more workers and equipment can be lifted. Together, these valuable product features give Terex a foundation to sell its booms at higher prices despite a competitive pricing environment. Moreover, the company has high exposure to this attractive product category, which based on our estimates makes up nearly half of the aerial work platform segment’s revenue. 

Terex’s materials processing brands are market leaders, serving a wide range of end markets. Its brands serve crushing and screening, concrete, material and scrap handling, and environmental applications, offering a wide range of products, including jaw crushers, screens and feeders, and washing systems. Of the global crushing and screening market, we estimate that Terex holds over 20% market share. We believe this illustrates that customers find value in Terex’s high-quality products. For customers, the key value driver in downstream products is operational efficiency, which we think Terex is adept at helping customers achieve. Greater operational efficiency leads to a lower total cost of ownership for customers. 

Terex distributes its products through multiple channels, which consists of dealers (majority of activity), rental companies, and directly to end users. In addition to selling Terex’s products, dealers also provide aftermarket parts and services to ensure their equipment operates efficiently and to limit machine downtime. Strong dealer networks typically create switching costs for customers, stemming from consistent parts availability and servicing capabilities. In Terex’s case, we think it has modest switching costs, as customers often work with third parties to service equipment. The company’s ability to improve its aftermarket business will be a point to watch in the coming years, given its higher-margin profile compared with new equipment sales. Additionally, a strong aftermarket offering can diversify Terex’s revenue base throughout the economic cycle.

We think Terex’s moves to divest underperforming businesses and focus on its two core segments will create a runway for strong returns on invested capital. In late 2015, Terex changed course. It brought on a new CEO and decided to transition away from businesses that failed to outearn their cost of capital, divesting its construction equipment, material handling and port solutions, and mobile cranes businesses. Adjusted returns on invested capital averaged over 14% from 2017-19 (prepandemic) compared with 9% in the five years preceding the current management’s tenure. We forecast that Terex’s adjusted returns on invested capital will average approximately 20% over the next five years and believe the company’s renewed focus will allow management to grow its core segments through organic (increased research and development spending to drive product innovation) and inorganic investments (small tuck-in acquisitions). We also think Terex will continue improving its cost base by rationalizing its manufacturing footprint and reducing its selling, general, and administrative spending. Management’s move to focus its efforts on two core operating segments (down from five segments) should increase cost efficiencies in its back-office operations and employee headcount.

We do not think Terex faces any substantial threats from environmental, social, or governance risks. Terex is exposed to product safety issues and carbon emissions regulation, but they are not material enough to include in our valuation. Product safety issues include both customer injuries while operating Terex equipment and injuries suffered by Terex employees in the production of products. Carbon emissions regulation is increasingly a topic of discussion, but we think Terex is already hedging this risk by developing next-generation products that reduce the carbon emissions of its products, namely its hybrid and electric-drive products. In late 2019, the company’s electric-drive products reached cost parity with its combustion engine products. Since, the company’s alternatively powered products have been successful with customers, helping them improve their total cost of ownership through fuel efficiency. We also believe Terex’s environmental business within its material processing segment will benefit from increasing environmental regulations. Government authorities could increase their focus on how waste is recycled and processed.

Narrow

Economic Moat

Terex

Terex Corp. engages in the manufacturing of aerial work platforms, cranes, and materials processing machinery. The firm designs, builds and support products used in construction, maintenance, manufacturing, energy, minerals and materials management applications. It operates through the following segments: Aerial Work Platforms and Materials Processing. The Aerial Work Platforms segment designs, manufactures, services and markets aerial work platform equipment, utility equipment and telehandlers. The Materials Processing segment designs, manufactures, services and markets materials processing and equipment, including crushers, washing systems, screens, apron feeders, material handlers, pick and carry cranes, rough terrain cranes, tower cranes, wood processing, biomass and recycling equipment, concrete mixer trucks and concrete pavers, conveyors, and their related components and replacement parts. The company was by George Arthur Armington founded in 1933 and is headquartered in Norwalk, CT.

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Terex Corp. engages in the manufacturing of aerial work platforms, cranes, and materials processing machinery. It operates through the Material Processing and Aerial Work Platforms segments. The Materials Processing segment designs, manufactures, services and markets materials processing and equipment, including crushers, washing systems, screens, apron feeders, material handlers, pick and carry cranes, rough terrain cranes, tower cranes, wood processing, biomass and recycling equipment, concrete mixer trucks and concrete pavers, conveyors, and their related components and replacement parts. The Aerial Work Platforms segment designs, manufactures, services and markets aerial work platform equipment, utility equipment and telehandlers. The company was by George Arthur Armington founded in 1933 and is headquartered in Norwalk, CT.

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