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Terex Reveals Management's Value

Posted: Oct 26, 2009 07:47 AM by Sham Gad

Tickers in this Article: DE, CAT, MTW, TEX

Terex Corp. (NYSE: TEX) is a global manufacturer of construction equipment. The company operates four divisions: aerial work platforms, construction, cranes, and materials and mining. It should come as no surprise that with the decline in construction and business spending, Terex has had a tough year.

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No Surprises
This week Terex reported third-quarter results that, on the surface, were terrible because the numbers came in below analysts' expectations. The company lost $103 million or 95 cents a share in the quarter. A year ago, Terex made $94 million or 96 cents a share. To top it off, sales were off by more than 51 percent. (For more, check out Earnings: Quality Means Everything.)

Listening to Terex's management describe the quarter and how it looks at its business illustrates why excellent management can make a great business. Having this type of management on board during recessions, on the other hand, is what makes Terex an excellent long-term business.

Mediocre businesses start thinking about risk during the economy's busts; great businesses think about risk all the time, even during prosperity. Terex clearly falls into the latter bucket. (For related reading, check out Profiting In A Post-Recession Economy.)

Thinking About The Cash
Before the recession really started gumming up business, Terex was being managed with a focus on liquidity and a strong balance sheet. As a result, amidst this terrible business climate, Terex finds itself with $1 billion in cash. That's an enviable position to be in, especially with that cash in the hands of capable management who will only make an acquisition if the price is right for the value obtained. Terex management has no false expectations about the immediate future. It has been actively cutting costs and working down inventory as it is now running a company that's doing half the business it did a year ago.

While the company reported a loss of $103 million in the quarter and $250 million for the first nine months of 2009, net cash used in operating activities was $15 million over those nine months. Management has made good on its efforts to prudently run the company during this recession. So far this year, Terex has generated nearly $500 million in cash from inventory sales and $437 million from receivables. (For more, check out The Characteristics Of A Successful Company.)

Best Among The Rest
So, despite what currently may appear to be better valuations or performance from competitors like Manitowoc (NYSE: MTW), Caterpillar (NYSE: CAT) or Deere (NYSE: DE), able and competent management deserves to be considered highly in any investment consideration. To be fair, I haven't looked at the above competitors' managements like I have with Terex, so theirs may also be excellent. The point is that while numbers usually don't lie, they also don't reveal all the relevant criteria about a business.

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By Sham Gad

Sham Gad is the Managing Partner of Gad Partners Fund's, value inspired investment partnerships modeled after the Buffett Partnerships of the 1950's. Previously, Gad ran the Gad Investment Group and delivered annualized returns of 22% from 2002 to 2005. Gad is also the author of "The Business of Value Investing" which will be out in the fall of 2009. Gad earned his MBA at the University of Georgia in May of 2007. Gad runs a value investing blog. He can also be reached by visiting the Gad Partners Funds site. When not writing or analyzing businesses, Gad enjoys hanging out with his wife Maggie, reading, golf, and yoga

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