Terex Q4 Earnings: Upside Likely Limited From Here (NYSE:TEX)

Summary

After 4Q22 results, I think expectations for Terex Corporation (NYSE:TEX) have reset higher given the strong 4Q performance. The stock jumped 10+% on top of a very strong rally off the lows of sub-30s. Positive EPS revisions should continue to be well received in the current market climate, which may already be pricing in a peak EPS scenario for TEX shares. Given the cyclical characteristics evident in 4Q22 results, I expect this trend to persist for some time. Most obviously, TEX’s backlog levels remain relatively high as the quarter comes to a close. An aging fleet, supply chain constraints, and resilient Non-Resi activity all contribute to the robust Aerial Equipment cycle that in turn supports the massive backlog. To be sure, TEX is still in a good position to gain from this cyclical durability; however, I believe sustained outperformance may be more limited given that multiples have re-rated upwards strongly back to historical average. It is unlikely, or rather hard to underwrite, for TEX to see a similar rally we the past few weeks/months unless one expects valuation to rerate strongly above average. In fact, I see potential scope for ongoing compression to the extent investors continue to price in peak cycle concerns. As such, I would hold back my horses in investing today, and wait for profit-taking price actions to kick-in before reconsidering.

Aerial Work Platform

Sales for the quarter totaled $672 million, up 26% y/y. Bookings wise, while 4Q22 bookings of $847 million declined 8% y/y, they increased 51% sequentially. At a record $2.9 billion, the total backlog is up 27% year-over-year, with the less than 12-month backlog increasing to $2.5 billion, also an increase of 27% year-over-year. Strong expansion was attributed by management to factors including high utilization rates, aging fleets, and electrification projects. The flow through from increased volume, a more profitable mix, lower costs, and more encouraging pricing resulted in a 320bps increase in AWP margin from last year. In 2023, AWP is expected to bring in between $2.6 and $2.7 billion in revenue, with an operating margin of about 9% (which would equate to an incremental margin of about 25%). In my opinion, the Utilities business unit will continue to benefit from the electrification tailwinds, as well as from the broader non-resi and manufacturing trends. While demand has remained strong, supply has lagged behind, and this will likely slow revenue growth in FY23 by a small margin.

Materials Processing

MP reported a 4Q22 revenue of $550 million, up 21% y/y, with strong customer demand across all of the company’s product lines. Positive mix shift and cost movements contributed to a 39% y/y increase in operating profit to $87 million and a 200bps improvement in margins to 15.8%. Bookings for 4Q22 grew by 16% annually to $508 million, while the backlog rose by 12% to $1.2 billion (although the less than 12 month backlog decreased by 12% annually and 7% sequentially). Importantly, the current MP backlog is significantly higher than the norm, which I take to be indicative of robust underlying demand. Management anticipates a $2-$2.1 billion revenue increase and an increase in operating margin of 20bps to 15.5% in FY23. It is also expected that 1Q23 margin will fall sequentially as a result of lower volumes and higher marketing expenses. I believe that MP, like the AWP industry, will benefit from the secular trends mentioned above, especially in the areas of infrastructure and the worldwide growth of recycling programs.

Capital allocation

None of TEX’s debts will come due until 2026, and roughly 75% of its debt has a fixed rate of 5% until FY30. While there is no interest expense tailwind, but it provides investors with visibility. Also, TEX has recently increased its share repurchase program by $150 million and increased its cash dividend by 15%, so I’d say it’s done what shareholders want in terms of capital allocation. Looking ahead, management has stated that M&As will continue to be a priority for Terex in order to expand the company’s technological capabilities and product offerings. For me, it is more important for TEX to strengthen its competitive position by reinvesting in the business if it is value accretive than to return to shareholders.

Guidance

Revenue for FY23 is projected to be between $4.6 and $4.8 billion, with operating margins of 10% to 10.4%, implying incremental margins of 21%, and EPS of $4.60 to $5.00. Importantly, management expects higher volume throughout the year in response to robust customer demand, providing additional room to increase pricing in order to compensate for price increases in inputs like materials and labor. The most important thing I learned is that demand is still anticipated to outstrip supply across the entire portfolio, but supply chain constraints will prevent stronger sales growth in FY23. Crucially, management stressed that sizable backlog cancellations and pushouts have not materialized despite continuing macroeconomic uncertainty – which I take as an indication we are not near the peak yet.

In addition, management guided to margin expansion this year thanks to the higher volume and active cost management. The guidance also includes management expectations of headwinds that are to be expected from the ongoing footprint improvement (there should manufacturing efficiency gaps until all facilities are fully opened and operational, which will constrain margin expansion to some degree).

Conclusion

In conclusion, after a strong 4Q performance, expectations for TEX have reset higher, leading to positive EPS revisions. However, sustained outperformance may be limited as multiples have re-rated upwards back to historical averages.