U.S. Construction Weighs on TEX

The U.S. mining equipment manufacturer Terex Corporation (TEX) reported first quarter EPS of $1.59, above our estimate of $1.35 and up 35.9% y-o-y, amid strong demand, higher margins and share repurchases. Going forward, volumes are expected to remain strong due to solid international end-market demand in Aerial Work Platforms (AWP), Mining, and Crane businesses.

Nevertheless, the company is suffering from continued supply-chain constraints mainly in the Construction, Cranes, and Mining businesses. The downturn in the U.S. residential construction spending has also adversely impacted the company's sales growth rate. Moreover, the recent rise in raw material costs might impact near-term margins. Our target price of $56.50 provides a return potential of approximately 9%. We retain our Hold recommendation on the stock.

The AWP segment generated a 7.1% y-o-y increase in the first quarter. Terex derives a substantial portion of the segment's revenue from international markets. The company is also increasing its production rates to serve the high backlog level $701.0 million at the end of Q108.

Terex is focused on lowering its debt levels supported by its strong cash generation. The company's net debt-to-capitalization ratio at the end of Q108 stands at a low 23.3%. Going forward, the cash flows would be utilized towards acquisitions, CAPEX, and share buyback. In Q108, the company repurchased 808.7 thousand shares for approximately $51.9 million.

Terex shares are trading at 7.6x our 2008 earnings estimate of $6.84 per share. We think its earnings will benefit from continued increase in sales of its mining equipment and AWP business, continued strong performance of the Crane division, and share repurchases. However, the company continues to face supply chain constraints and the downturn in residential construction spending in the U.S. has adversely impacted its sales growth rate.

Interstate Hotels at a Good Price

Although the U.S. hotel industry has shown recent signs of weakness, we believe that the sell-off is unjustified, given Interstate Hotels & Resorts Inc.'s (IHR) position within the industry, and we view the current share price to represent a buying opportunity.

Although in our opinion the company has made great strides in recent months, the operating environment in the U.S. lodging industry is feeling the impact of weak economic growth and financial pressure on consumers. As such, the valuations afforded to lodging companies have contracted to reflect the current state of the lodging cycle.