Will Higher Risk Mean a Greater Return for Terex Shareholders?
Shares of Terex (NYS: TEX) got a 6% boost this week after Wells Fargo upgraded the company to "buy" and raised its outlook for the stock's earnings. The company, which manufactures construction and mining equipment, is benefiting from better cost control, as well as increased exposure in South America thanks to recent acquisitions. But don't be fooled by the cheery forecast. Terex stock has a volatile personality, despite a favorable earnings forecast for its current quarter.
Terex contains a beta north of 3, which tells us the stock is extra-touchy when it comes to swings in the market. For comparison, look at the 1.48 beta of rival Deere (NYS: DE) . The metric measures a stock's price volatility relative to the broader market, with the market assigned a beta of 1. Therefore, if your stock has a beta greater than 1, it will more often than not fluctuate more wildly than the stock market.
Sounds simple. But beta alone is not always the best assessment of risk. While beta gives us a quick read on price volatility, it's important to also size up the company's fundamentals and the industry at large in order to get the full scope of long-term risk.
In 2011, Terex returned to profitability, with net sales climbing 48% compared to the year prior. The company's operating margin struggled last year, although margins should expand going forward as management continues to cut costs within its Cranes segment as well as ongoing cost savings in its German operations. Its Cranes business accounted for 30% of net sales last year. The company's main competitor in this space is crane manufacturer Manitowoc (NYS: MTW) .
Both Terex and Manitowoc climbed the rankings of this year's International Construction's Yellow Table -- a rating of the top construction manufacturers by revenue. Terex ranked eighth on the chart, while Manitowoc landed in the top 20. Construction on commercial buildings has picked up again in 2012, which should drive growth for these companies. Terex is well positioned in the market and management is making the right moves for continued improvement.
To buy or not to buy
However, this stock is not for the faint of heart. Terex currently trades around $24 a share with a devastatingly high P/E of 71. For context, industry peers like Caterpillar (NYS: CAT) and Deere trade at P/E multiples of 14 and 12 times earnings, respectively. It's also worth mentioning that Caterpillar, Deere, and Manitowoc all pay a respectable dividend, whereas Terex does not.
Terex is heading in the right direction and I do anticipate future growth for the company, but when you weigh the positives and negatives against industry peers it's hard to justify the risk. I'd wait for a dip in price before jumping in. In the meantime, I'm adding Terex to My Watchlist so I'll know when it's time to give this stock a second look. I encourage you to use The Motley Fool's free Watchlist tool to track and monitor your favorite stocks. To get started, simply click the link below for the stock you want to screen -- it's free .
At the time this article was published Fool contributor Tamara Rutter does not own shares of any stocks mentioned in this column. Follow her onTwitter, where she uses the handle@TamaraRutter, for more Foolish insight and investing advice. The Fool owns shares of and has created a covered strangle position in Wells Fargo.Motley Fool newsletter serviceshave recommended buying shares of Wells Fargo. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.