Terex Plagued With Supply Chain Challenges & Higher Costs

On Dec 17, we issued an updated research report on Terex CorporationTEX . Of late, the company has been plagued with supply-chain challenges in mobile crane operations and higher input costs owing to the implementation of tariffs.

Crane Segment to Incur Loss in Q4

The company's Cranes segment (which contributed 24% to the company's revenues) witnessed supply-chain challenges in mobile crane operations during the first three quarters of 2018. Notably, the segment's operating results were negatively impacted by disruption in mobile cranes factory, caused by material shortages. Even though the company addressed supply chain challenges in the quarter, it was not as expected.

Terex anticipates the Cranes segment to break-even or generate a small profit in the fourth quarter on the back of the abovementioned headwind and raw material inflation. However, it will suffer an operating loss margin of 2.3% for the full year, down from the previous expectation of operating loss margin of between 1% and 1.5% for fiscal 2018. The company guides sales growth of 11% for fiscal 2018, lower than its previous expectation of growth of 13%. Moreover, the company updated production plans for the segment owing to the abovementioned supply chain challenges.

Input Costs to Weigh on 2018 Results

Terex anticipates fiscal 2018 sales to be up 17% to $5.1 billion (down from the prior projection of 18%). Additionally, the company anticipates operating margin at around 6.6% in 2018, a tad lower than the prior guidance of 7%. The company lowered adjusted earnings per share guidance for 2018 to $2.60-$2.70 from the previous guidance of $2.80-$3.00 due to lower-than expected third-quarter results. Further, higher input costs, including tariffs, and foreign exchange headwinds resulted in the trimmed guidance.

Terex's margin outlook has been lately tempered by pricing and steel cost headwinds. The market prices and futures prices for steel increased significantly since the first quarter due to the imposition on certain steel imports. Inability of the company to pass on the increase by implementing price hikes owing to the competitive environment adds to concern. This is likely to dent its margins.

Estimates Moving South

The company's estimates have also gone down. The Zacks Consensus Estimate for the fourth quarter has moved south 32% over the past 60 days. Over the same time period, the Zacks Consensus Estimate for fiscal 2018 and fiscal 2019 has been revised downward by 9% and 6%, respectively.

Over the past year, shares of Terex have plunged 41%, compared with the industry 's decline of 17%. Also, the company's stretched valuation is a concern. Terex's trailing 12-month EV/EBITDA ratio is 6.7, while the industry's average trailing 12-month EV/EBITDA ratio is pegged lower at 6.4. This implies that the stock is overvalued.

Terex currently carries a Zacks Rank #4 (Sell).

Stocks to Consider

Some better ranked stocks in the same sector are DMC Global Inc. BOOM , CECO Environmental Corp. CECE , and Northwest Pipe Company (NWPX). While DMC Global sports a Zacks Rank #1 (Strong Buy), CECO Environmental and Northwest Pipe carry a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

DMC Global has a long-term earnings growth rate of 20%. Its shares have increased 57% in the past year.

CECO has a long-term earnings growth rate of 15%. The company's shares have surged 48% in the past year.

Northwest Pipe has a long-term earnings growth rate of 10%. Its shares have gained 26% in the past year.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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