Summary & Overview
TEX can be a volatile name and we have been waiting since our March 2013 Mining & Construction Equipment call for an entry opportunity below our fair value range. We think $26 is close enough to put a toe in the water. See here for a more detailed discussion of our views on TEX and the niche construction equipment industry. In the machinery space, we think TEX is a good swap for CAT – keep construction equipment, dump mining/resources equipment.
Construction Concerns Likely Overblown: The Architectural Billings Index has moved back into positive territory, suggesting that the rebound in commercial construction is likely to regain momentum and persist well into 2014. Residential construction is also likely to continue its robust recovery, despite increases in mortgage rates. Construction equipment sales have rebounded a bit, but should retain a cyclical tailwind for some time.
Cycles Are Slow: Potential can get ahead of reality in cyclical recoveries, as we think happened to TEX in early 2013. For example, the Architectural Billings Index leads nonresidential construction by 9-12 months. The index only turned sustainably positive in 4Q 2012, indicating just the start of a rebound 2H 2013. It takes time, but disappointment at the pace of recovery can provide entry opportunities.
Already Pre-Announced: Expectations for TEX have already been reset to more reasonable levels with its mid-June preannouncement. Management may still abandon its long term goal of >$5/share/$10 billion in revenue for 2015. But, as they have said, that target is a “goal” and not “guidance”. While dropping the target is a potential negative catalyst, we do not think investors expect TEX to achieve it. For example, 2015 consensus is only at $3.80.
Great Sale of Mining Exposure: Much of TEX’s remaining “mining” exposure is from its Materials Processing business, which we believe is more exposed to construction, quarrying, and recycling than to traditional mining (copper, iron ore etc.). The unit is a small part of the TEX mix. TEX sold its traditional mining equipment business to Bucyrus, now part of CAT, in early 2010. While they may not have exactly top-ticked the mining capital spending bubble, they came very close. Management that gets cyclical businesses is a tremendous asset.
AWPs International Penetration: Over-time, increasing worker safety regulation should drive greater use of aerial work platforms (AWPs) in less developed markets. The AWP market is dominated by TEX and OSK, and both would likely benefit from higher AWP demand growth outside of North America and Europe. In developed markets, easing small business credit conditions should facilitate the acquisition of equipment by smaller rental companies. As the large rental companies are fond of pointing out, there are still lots of small equipment rental companies.
Municipal Spending Environment: Municipal finances should generally improve with rebounding home prices, Detroit aside. This key end-market for TEX and OSK has been depressed for some time.
Port Investment: Global trade growth has been unusually weak since the financial crisis. Historically, global trade has grown at a faster clip than global GDP. We expect that growth to eventually resume, with port equipment investment following. The expansion of the Panama Canal is also a potential boost for port investment.
Well Structured Markets: Many of TEX’s businesses compete in industries structured for favorable long-term returns. Cranes and AWPs are notably consolidated.
Cyclical Tailwind and Valuation Upside: We value TEX in the $26-$52 range. Given several positive cyclical tailwinds in the pipeline, we think that the recent decline provides an interesting point to consider an initial position.
(Both TEX and OSK suffered from the decline in cement mixer demand, which was pretty spectacular)