Flying High

Our society is quickly digitalizing, but we are still dependent on physical buildings and infrastructure – and the companies building these all-important buildings, roads, piping, and power lines depend on the machinery and equipment needed to perform these tasks.

While the demands of the construction, mining, and energy sectors continue to evolve, the needs remain consistent: reliability, efficiency, and innovation. To thrive in this environment, a business must not only provide stellar equipment but also foresee the trajectory of these industries, positioning itself to be ahead of the curve.

Today, we are adding one such business to our Smart Investor holdings. This company manages to strike a balance between innovation, expansion, and fiscal responsibility.  But first, let us delve into a short update on the economy and markets, and the Smart Investor calendar.


Economy and Markets: Looking Forward

There are several important reports scheduled to be published in the next few days:

  • Later today, we will receive the Federal Reserve’s interest rate decision following the policymakers’ meeting. The Fed’s policy rate is widely expected to stay unchanged this time. Market participants will focus on the central bank’s economic projections, as these could shed some light on the Fed’s further moves.
  • On Thursday, we will receive the index based on September’s Philadelphia Fed Manufacturing Survey, which measures the manufacturing conditions in the survey area (Philadelphia, New Jersey, and Delaware); this is considered to be an accurate leading indicator of the two nationwide reports, Manufacturing PMI and ISM Manufacturing indexes.
  • On Friday, we will get preliminary reports on September’s S&P Global Manufacturing PMI and Services PMI. These reports measure business conditions in the manufacturing and services sectors, two main sectors of the U.S. economy, which directly affect economic growth. PMI indices are leading economic indicators used by economists and analysts to gain timely insights into changing economic conditions since the direction and rate of change in the PMIs usually precede changes in the overall economy.


As for the stock calendar, the Q2 2023 earnings season for Smart Investor Portfolio companies is almost finished, with no reports scheduled to be published this week.

The ex-dividend date for Broadcom (AVGO) is today; the X-date for General Electric (GE) is coming on September 25th.

Today, we are adding a company that supplies machinery for construction, aerial work, and materials processing. Even though this is a mid-cap company belonging to a demanding, comparably lower-margin industry, it carries stellar financial ratios and showcases outstanding profitability metrics, as well as fast earnings growth.

To make room for this valuable addition, we are letting go of the stock of one of the world’s largest and most profitable air carrier companies, whose outlook is muddled by macro factors, affecting demand and pricing, as well as higher fuel and labor costs.


New Addition: Terex Corporation (TEX)

Terex Corporation is an American manufacturer of materials processing machinery and aerial work platforms. TEX designs, builds, and supports products used in a variety of industries including construction, maintenance, infrastructure, quarrying, recycling, energy, mining, shipping, transportation, refining, and utilities.

The company operates through two main segments: Aerial Work Platforms (AWP) and Materials Processing (MP).

The AWP segment designs, produces, markets, and services aerial work platform equipment, utility equipment, telehandlers, and light towers. This segment’s products comprise portable material lifts, portable aerial work platforms, trailer-mounted articulating booms, self-propelled articulating and telescopic booms, scissor lifts, as well as related components and replacement parts. The AWP segment is responsible for about 60% of total global sales.

The MP segment supplies materials processing and specialty equipment, including crushers, washing systems, screens, apron feeders, material handlers, wood processing, biomass and recycling equipment, concrete mixer trucks and concrete pavers, and their related components and replacement parts. The MP segment is responsible for about 40% of total global sales.

The company also offers financial products and services assisting customers in the acquisition of equipment through its Terex Financial Services division.

Terex was founded in 1933 under the name “Euclid Company,” specializing in building hauling trucks. From 1953 to 1986 the company was a subsidiary of General Motors (GM). The company grew and diversified over the years, principally through acquisitions, changing its name to “Terex” in 1970. In 1991, Terex was first listed on The New York Stock Exchange (NYSE).

Since going public, Terex’s development has been driven by acquisitions, with one of the most sustained inorganic growth sprees in the industry. The company has acquired a large number of businesses, buying into multiple new markets and expanding its presence in existing markets. Over the years, TEX has also divested from multiple non-core business activities.

The most notable acquisitions of recent decades were those of Genie Industries (U.S.) and Fuchs (Germany) in 2002, Recom (Italy) in 2012, Continental Biomass (U.K.) in 2015, Franna (Australia) in 2019, Tower and Rough Terrain (Italy) in 2020, ZenRobotics (Finland), ProAll (Canada), and Steelweld (Northern Ireland) in 2022. The most recent purchase was that of MARCO, a manufacturer of bulk material handling conveyors, based in Mt. Vernon, Missouri, in April 2023.

TEX’s strategy of acquisitions has led to wide business expansion, as well as product, end-customer, and geographical diversification. While North America is the largest geographical segment responsible for approximately 60% of global sales, Western Europe and Asia-Pacific provide for about 20% and 15% of the total. The company caters to all industries using heavy machinery and lifting equipment. The strategic acquisitions have also helped Terex to build a significant market presence in its main lines of business; today, more than 80% of its sales are generated in markets where the company is a Top-Three market leader.

Terex Corporation is headquartered in Norwalk, Connecticut; its products are manufactured in North America, Europe, Australia, and Asia and sold worldwide. Today, it commands a market capitalization of $4 billion and a workforce of 9,300. It belongs to the Industrial sector (Industry: Farm & Heavy Construction Machinery).

TEX’s financial health is no less than perfect. The company has been on a mission to reduce debt in the past decade; currently, it features a medium-low (30%) net debt-to-equity ratio. TEX’s short-term assets exceed both its short- and long-term liabilities; its debt is well-covered by operating cash flow, while EBIT covers its interest payments many times over. The importance of low leverage in a high interest-rate environment cannot be overestimated, especially for small- and medium-cap companies.

Terex’s financial efficiency metrics are outstanding. It boasts a Return on Equity (ROE) of 35% and a Return on Assets (ROA) of 14.5%, much higher than the sector’s averages. The company features an industry-beating Return on Invested Capital (ROIC) of 22%. TEX’s profitability and efficiency at using capital are also reflected in its operating margin of 12% and net profit margin of 9%, which are much higher than the average in its industry.

The company’s revenues rose at a CAGR of 13% in the past three years, while EPS grew at a CAGR of 120% over the same period. While three-year EPS growth was strongly driven up by post-pandemic rebound, the company continuously displayed strong earnings results over the years. Out of the last eight quarters, TEX registered double- or triple-digit EPS growth in seven reports. Earnings per share surged 116% in the first quarter and 120% in the second quarter of 2023.

In Q2 2023, Terex surpassed analysts’ revenue and EPS estimates for the seventh quarter in a row. In the second quarter, sales rose 30% year-on-year, and income from operations surged 102%; EPS more than doubled compared with the same quarter of last year. On the back of these outstanding results, the company has lifted its full-year 2023 outlook for sales, margins, EPS, and free cash flow.

Terex’s strong fundamentals and numbers-based optimism regarding further earnings growth have been reflected in the stock’s outperformance. TEX’s stock has brought its investors 78% in the past 12 months and 172% in the past three years. Those numbers compare favorably to 16% and 33%, respectively, for the sector’s flagship ETF, the Industrial Select Sector SPDR Fund (XLI).

Despite the outstanding performance, Terex’s shares are very attractively valued, at a TTM P/E of 9.2 and a Forward P/E of 8.4, representing about a 55% discount to the Industrial sector. The company is trading below average for its peers in the industry, its historical price-to-earnings, and its fair value.

It should also be noted that, in addition to the stock appreciation, the company rewards its shareholders through dividends and buybacks. Terex pays a quarterly dividend with the yield currently standing at 1.03%. Although its dividend yield is lower than the average for its sector, the company’s track record of steady dividend increases, backed by its financial strength, signals future dividend growth. Terex’s latest dividend increase was in July 2023, when the payout was lifted by 13% – that, following a 15% increase in February this year.

In December 2022, Terex’s Board of Directors authorized a new share repurchase program of up to $150 million (with no termination date), in continuation of the previous program announced in July 2018. The company’s continued commitment to return capital to shareholders is supported by its balance sheet strength and expectations for future robust free cash flow generation.

TipRanks-scored top analysts foresee an average upside of 18% for the stock in the next 12 months. Terex carries a “Perfect 10Smart Score rating on TipRanks with a “Moderate Buy” recommendation:

To conclude, we view Terex Corporation as a winning combination of quality, growth, and value investment. Its stellar finances, outstanding earnings growth, and attractive valuation, combined with its commitment to return capital to shareholders, make it a treasurable addition to the Smart Investor portfolio.


New Deletion: Delta Air Lines (DAL)

Delta Air Lines, Inc. is one of the major airlines of the United States and a legacy carrier. The company provides scheduled air transportation for passengers and cargo. With a market capitalization of $25.2 billion, it is one of the largest airlines in the world and the largest in the U.S.

Delta is also one of the most profitable airlines in the world. However, the entire air carrier industry is now entering a rough patch and is expected to see much lower profitability in the months ahead, with risks tilted to the downside.

Air travel is highly cyclical, with demand and prices declining strongly in the colder months. This fact alone isn’t a consideration for long-term investors, but coupled with other factors coming into play, it raises some concerns.

Many companies, including airlines, are now warning that a surge in fuel costs and the rising cost of wages will considerably reduce their profits. The oil price seems to be well on its way to reaching $100 a barrel, pressuring bottom lines. At the same time, labor unions in different industries are pushing for increased compensation. Pilots at Delta and its competitor American Airlines (AAL) have already secured higher pay; other employees may follow suit in demanding better pay and working conditions. Airlines are feeling the pinch since labor and fuel comprise most of their expenses.

In the second quarter of the year, air carriers could easily deal with higher labor costs, given that jet fuel and diesel prices were about 25% lower, while travel demand surged. However, even in high-demand summer months, airlines’ bottom lines were already somewhat impacted by falling domestic ticket prices. Airfares surged in 2022 on post-pandemic pent-up demand and savings, driving record revenues for the industry. However, as pandemic savings dwindled and inflation ate into wages, passengers became choosier, often foregoing weekend getaways to save for a trip abroad. Transatlantic flights are the most profitable for carriers, but they account for only about 15%, on average, of the total passenger revenue of “the big three” – Delta, American Airlines, and United Airlines (UAL).

In August, domestic airfares declined for a fifth straight month, hitting pricing power and raising concerns that the carriers will not be able to counterweigh rising costs by increasing prices. Carriers operating mostly domestic flights have already seen their profits squeezed, with some reporting a quarterly loss. As the economy softens and consumer finances weaken, international travel is expected to decline, as well, pressing on the bottom lines of large airlines with the abundance of international flights.

Delta, American Airlines, United Airlines, and other major carriers have already issued warnings about lower profits in the current quarter. The winter quarters will be weaker even if fuel prices stabilize, as airlines usually register lower international flight volume in the winter.

In its Q2 2023 earnings report, featuring record revenue and EPS, Delta Airlines cut its earnings forecast for Q3 by 15%. Revenues are expected to increase this quarter on surging transatlantic travel, and profits are still expected to come in at the top of the historical range; however, the outlook for the following quarters is very uncertain.

Bank of America analysts have cut their outlook and price targets on all major U.S. air carriers, citing higher fuel and labor costs, depressing margins. Several other Wall Street analysts followed suit, lowering their targets on airline stocks, including Delta. Although DAL is the most profitable carrier, displaying the highest quality among its competitors, it cannot avoid the industry-wide downside risks. While fuel costs might come down, the negative macroeconomic trends will not reverse quickly.

The amplified risks to profits in the next quarters are reflected in airline stocks’ performance, with the U.S. Global Jets ETF (JETS) down more than 20% from its recent peak in July and 36% off from its post-pandemic high in March 2021. DAL stock has performed much better than its industry, clocking in an almost 20% increase in the past 12 months, versus 2% for the ETF. This outperformance, coupled with the fact that Delta’s valuation is much higher than that of its main competitors (AAL and UAL), raises concerns that the expected margin squeeze hasn’t yet been fully priced in the stock, which means it may have further to fall. Therefore, we find it prudent to sell the stock at this point.


Charter Members of the 30% Winners Club

*The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.

The exclusive club’s ranks have not changed from the previous week, still including five stocks: GE, TECK, ORCL, AVGO, and CDW.

ANET is still the closest runner-up with a gain of 22% since its purchase three months ago. Will it be able to close the gap, or will someone else outrun it to the finish line?


What’s Next?

Our next commentary will come out on Wednesday, September 27th, before the market opens.

Until then – we wish you a world of investment success!

Access the full Smart Investor Archive, including all historical stock picks and original newsletters.


Portfolio Changes

New Portfolio Additions

Ticker Date Added Current Price
TEX Sep 20, 23 $58.54

New Portfolio Deletions

Ticker Date Added Current Price % Change
DAL Feb 8, 23 $39.45 +0.03%

Current Portfolio Holdings

Ticker Date Added Current Price % Change
GE Jul 27, 22 $116.21 +107.96%
TECK Dec 8, 21 $42.52 +52.84%
ORCL Dec 21, 22 $112.77 +38.37%
AVGO Mar 22, 23 $849.20 +34.60%
CDW Jun 29, 22 $208.67 +32.00%
ANET Jun 21, 23 $184.83 +21.99%
WCC Sep 14, 22 $152.39 +13.59%
MOH May 3, 23 $329.44 +9.99%
GD Dec 22, 21 $222.85 +9.37%
CHKP Jul 19, 23 $137.31 +7.85%
STLA Sep 6, 23 $19.34 +6.50%
ADM May 10, 23 $79.10 +5.98%
CI Jul 12, 23 $284.64 +5.94%
APD Apr 26, 23 $299.23 +4.74%
AMAT May 31, 23 $137.71 +3.31%
ACN Aug 16, 23 $317.33 +3.15%
VRTX Aug 2, 23 $358.26 +3.03%
TDY Aug 30, 23 $421.85 +1.35%
PERI May 17, 23 $31.21 -0.16%
UNH Apr 19, 23 $480.66 -1.14%
STM Sep 13, 23 $43.34 -1.88%
JBL Jul 5, 23 $107.10 -1.91%
APH Aug 9, 23 $86.29 -2.43%
GPK Jul 26, 23 $23.30 -2.71%
OXY Oct 5, 22 $65.81 -2.85%
ALG May 24, 23 $168.73 -3.68%
TSM Aug 23, 23 $88.17 -5.99%
EPD Jan 15, 20 $26.99 -6.67%
INMD Jun 28, 23 $33.73 -7.99%
DE:IFX Apr 5, 23 $31.72 -10.62%
LW Apr 13, 23 $97.24 -11.17%
ALB Jun 14, 23 $179.99 -20.50%


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