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Industrial company Terex (TEX) is encountering some macroeconomic headwinds as its customers scale back on planned deliveries and adjust their inventory levels, causing the provider of aerial work platforms and materials processing machines to lower its FY24 EPS and revenue guidance. So far, the losses for TEX shares have been pretty manageable considering the magnitude of the guidance cut, especially for EPS ($5.80-$6.20 from $7.15-$7.45), and some of TEX's closest peers -- CNN Industrial (CNH), Manitowoc (MTW), and Astec Industries (ASTE) -- are trading higher despite the gloomy update.

We would mostly chalk this resiliency up to yesterday's 50-bps interest rate cut from the Federal Reserve and the general expectation that rates will continue to slide lower. TEX and its competitors are highly cyclical companies with heavy exposure to construction and infrastructure projects, making them sensitive to the interest rate environment. Therefore, some participants may already be looking beyond FY24 and into FY25, when lower rates should bolster construction activity.

• With that said, the downturn that TEX has recently experienced is both sudden and considerable. Recall that when TEX reported Q2 results on July 30, it raised its FY24 EPS guidance to $7.15-$7.45, up from its prior outlook of $6.95-$7.35, while only nudging its revenue outlook slightly lower to $5.10-$5.30 bln versus its previous guidance of $5.20-$5.40 bln. In this morning's press release, TEX knocked its revenue outlook down to $4.85-$5.05 bln.
• During the Q2 earnings call, CEO Simon Meester offered a rather bright characterization of the U.S. economy, pointing to its resiliency, lower inflation, and healthy construction spending. Furthermore, he stated that TEX's U.S. rental customers are returning to more normalized ordering patterns and that he expects demand in the U.S. market to remain robust.
• Since then, conditions have clearly weakened, as reflected in TEX's guidance cut. From a longer-term perspective, though, the company is still positioned to capitalize on a number of mega trends, including the construction of data centers and EV manufacturing plants, as well as increased construction activity from road, bridge, airport, and railway infrastructure projects.
• Additionally, TEX is on track to close on its acquisition of Dover's (DOV) Environmental Solutions Group, or ESG, in early Q4. The $2.0 bln acquisition -- the largest in TEX's history -- not only will provide a major boost to the top-line (ESG is in line to generate $1.4 bln in revenue on a TTM basis), but it will also add a steady, non-cyclical North American business to the portfolio. ESG, a leader in the refuse collection and recycling markets, is also profitable and TEX expects ESG's EBITDA margins to add 130 bps of margin accretion.

The main takeaway is that while TEX's FY24 guidance cut is disappointing, especially since it comes on the heels of an encouraging Q2 report, the longer-term outlook still looks promising for the company as interest rates drift lower and as the company integrates the ESG acquisition.