Terex Confirms Construction Slowdown-Shorting the Homebuilders

I had remarked in previous posts the divergence between homebuilder stock prices and the price of lumber- the two of which tend to move with a high degree of correlation. That is up until just recently with the prices of lumber falling around 20% versus the steady climb in the shares of homebuilders. The narrative on the Street has been the price of lumber has fallen due to an supply issue, as idled lumber plants come back online.

This morning however, Terex (ticker TEX) provided some evidence that it is just not a supply issue, but that the price of lumber has probably also declined due to a slowdown in demand. In case you are not aware, TEX is construction equipment manufacturing building all sorts of heavy equipment including cranes, aerial platforms, and various construction equipment. The company primarily sells into the construction markets- be it residential, commercial, etc. The company states in their press releases......

Terex Corporation (NYSE: TEX) today announced that it is lowering its full year 2013 guidance and providing second quarter guidance.  Full year 2013 earnings per share is now expected to be between $1.90 and $2.10, as adjusted for certain non-recurring items.  Previous full year 2013 guidance was an earnings per share of between $2.40 and $2.70.  Due to the timing of this announcement the Company is also providing second quarter 2013 earnings per share guidance of $0.50 - $0.60 per share, excluding certain non-recurring items.

"The level of sales growth has softened overall for Terex when compared with the increases we originally anticipated for 2013," commented Ron DeFeo, Terex Chairman and CEO.  "More specifically, we are experiencing a softer marketplace for our Construction, Material Handling & Port Solutions ("MHPS"), and, to a lesser degree, our Cranes operations.  We do continue to experience positive replacement demand for Aerial Work Platform products and solid performance for Materials Processing. However, strength from these businesses will not offset the revenue variances of the balance of our business."

"Fundamentally, North America continues to improve, but now at a slower pace, while Europe remains challenging overall, and the markets in the rest of the world are mixed.  We remain generally on track with the operating changes underway, including the cost reduction initiatives in our MHPS and Cranes businesses, as well as the divestiture of underperforming businesses in our Construction segment.  We continue to expect that the second half of 2013 will show improved results when compared with 2012."

There you have it. The construction markets are slowing. 

Further still,  it is my opinion that this slowdown in construction is not reflected in the price of the homebuilders, as the stock prices of the group remains in an uptrend.

 

while the gap between homebuilders stock prices and the price of lumber is huge.....

This is while the homebuilders (as defined by the XHB or the S&P homebuilders ETF) is trading at a premium P/E of 21x trailing earnings versus 18x on the S&P 500. I will be taking a short position in the homebuilders ETF today.