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As Market Climbs Out of Basement, Terex's Prospects Improve

The construction equipment maker builds a solid foundation to tear down debt levels.

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Over the past several quarters, Terex (TEX) has enjoyed solidifying end markets, improved internal operations, and an appreciating stock price, but we think the company has a runway for further improvement. Although the firm holds sizable exposure to Western Europe (more than one fourth of total revenue), some leading signs in the region have proved encouraging in recent months. Moreover, the U.S. nonresidential construction picture has seemingly bottomed, and indicators here also suggest improvement in the coming quarters. Along with better cost control, continued working capital improvement, and further integration of acquired companies, this environment should help Terex expand its operating margin over the next few years, with potential for additional debt reduction as well. In all, we think the company's prospects remain sound, and the market currently offers a decent margin of safety for investors.

U.S. End Markets Strengthening, Europe Not as Bad as Feared
Year-over-year revenue growth rates for Terex's end markets turned positive in late 2010 and early 2011, and the company has enjoyed double-digit sales gains in each quarter since. Part of these increases stem from some increased end market activity, but we attribute most of this success in the firm's aerial work platform segment (about 27% of 2011 revenue) to customers' fleet replacement. Several periods of delayed capital expenditures resulted in aging fleets, but increasing rental utilization has led to increased purchasing in recent quarters. The aerial work platform segment sells the vast majority of its products to rental customers; as equipment usage has climbed, so too have orders for new products. Given the aim to reduce fleet ages and continued end market improvement, we anticipate that Terex will see further growth in its aerial work platform business in the near term, though probably at lower growth rates than last year simply because of more difficult comparisons.

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Adam Fleck does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.