Share price has been rising as if all were well in the world and particularly at Terex. Hmm! MeanwhileTerex will not make any money this year and probably not next year. Even in the good times their operational margins were poor compared to their competitors ... <font>
Like Gordon Brown’s government, Terex is currently trying to take credit for suddenly doing all the good management things that arguably it should have been doing all along. Of course few could have foreseen the scale of the current economic collapse that has impacted all business lines, but Terex went into the problem with excess working capital, manufacturing capability and unfocussed business lines. Return against inventories, receivables and PPE peaked at 25%; compare and contrast with leading competitors who have dipped to 25% in the depths of the current downturn. <font> </font> <font> </font>
Far away the biggest component of working capital is Inventory. By Q1 09 they had reduced Raw Material Inventory by $90mm. The target for overall Inventory reduction in 09 is around $500mm. (Currently it totals >$2bn). When you look at the historic returns of Terex compared to leading competitors, they might well have instigated some harsher inventory control earlier. (Caterpillar’s Inventory to sales as at Dec 08 was ~17% vs. Terex’s 24%)
Aftermarket services represents around 20% of net sales. This low end number creates an opportunity according to management’s spin, but perhaps highlights what might have been done better in the past to improve the quality of earnings.
Just one division, Terex’s Mining and Materials Processing operations have both a strong market position and high aftermarket sales intensity. This segment has remained profitable despite the dreadful underlying conditions.
The near term funding situation is now stable having recently renegotiated banking covenants; refinanced debt; issued additional equity and a convertible. (Total proceeds ($612mm).
But not going bust is not the same as going profitable or growing strongly. Of course if you like your cyclicals cyclical then Terex can be an interesting investment proposition from time to time. Certainly its ‘recovery’ share possibilities were high - and arguably have been exceeded- but there is a lot of work to be done to get Terex the corporation working as it could; or as it should.
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$23.02 (10/15/09)
