Industrial company Terex (TEX, Financial) is facing macroeconomic challenges as customers reduce planned deliveries and adjust inventory levels. This has led Terex to lower its FY24 EPS and revenue guidance. Despite these setbacks, TEX shares have managed to limit losses, even with a significant EPS guidance cut ($5.80-$6.20 from $7.15-$7.45). Interestingly, Terex's peers, including CNN Industrial (CNH, Financial), Manitowoc (MTW, Financial), and Astec Industries (ASTE, Financial), are trading higher despite the negative update.
One factor contributing to this resilience is the recent 50-bps interest rate cut from the Federal Reserve, with expectations of further rate reductions. Companies like Terex, which are heavily involved in construction and infrastructure projects, are sensitive to interest rate changes. Some investors are already looking beyond FY24 to FY25, anticipating that lower rates will boost construction activity.
- Terex has experienced a sudden and significant downturn. In its Q2 report on July 30, the company had raised its FY24 EPS guidance to $7.15-$7.45 from $6.95-$7.35 and slightly lowered its revenue outlook to $5.10-$5.30 billion from $5.20-$5.40 billion. However, the latest guidance has revised revenue down to $4.85-$5.05 billion.
- During the Q2 earnings call, CEO Simon Meester had a positive outlook on the U.S. economy, citing resiliency, lower inflation, and strong construction spending. He also noted that U.S. rental customers were returning to normalized ordering patterns and expected robust demand in the U.S. market.
- Conditions have since deteriorated, as evidenced by the guidance cut. However, Terex is still well-positioned to benefit from long-term trends such as the construction of data centers and EV manufacturing plants, as well as increased activity in road, bridge, airport, and railway infrastructure projects.
- Additionally, Terex is set to finalize its acquisition of Dover's (DOV, Financial) Environmental Solutions Group (ESG) in early Q4. This $2.0 billion acquisition, the largest in Terex's history, is expected to significantly boost revenue (ESG generates $1.4 billion annually) and add a stable, non-cyclical North American business to its portfolio. ESG is profitable, and Terex anticipates a 130 bps increase in EBITDA margins.
The key takeaway is that while Terex's FY24 guidance cut is disappointing, the long-term outlook remains promising. Lower interest rates and the integration of the ESG acquisition should benefit the company moving forward.
