Terex Corporation: A High-Cash-Flow, Undervalued Industrial Play Amid Resilient Megatrends

Terex Corporation (NYSE: TEX) has emerged as a compelling industrial investment in 2025, offering a rare combination of capital-efficient growth, robust free cash flow (FCF) generation, and strategic alignment with low-cyclical megatrends. As global markets grapple with macroeconomic volatility, Terex's ability to convert earnings into cash at a 108% free cash flow conversion rate, coupled with a 75% domestic production advantage and rising demand in Waste & Recycling and Infrastructure, positions it as a durable, value-creating opportunity for long-term investors.

Capital-Efficient Growth: A 108% Free Cash Flow Conversion Engine

Terex's financial performance in Q2 2025 underscores its operational excellence. The company reported a free cash flow conversion rate of 108%, meaning it generated $1.08 in FCF for every $1 of net income. This metric, calculated as FCF ($78 million) divided by GAAP net income ($72 million), reflects disciplined cost management, efficient working capital utilization, and a focus on high-margin operations.

This outperformance is not a one-off. Terex's full-year 2025 outlook projects an FCF conversion rate of over 120%, driven by its strategic prioritization of cash flow generation. The company's ability to exceed 100% conversion highlights its capacity to reinvest in growth or return capital to shareholders. For example, in Q2 2025, Terex returned $75 million to shareholders via dividends and share repurchases, while allocating $24 million to capital expenditures. This balanced capital allocation strategy—prioritizing both growth and shareholder returns—creates a flywheel effect, amplifying long-term value.

Strategic Resilience: 75% Domestic Production Mitigates Tariff Risks

A critical pillar of Terex's competitive advantage is its 75% domestic production rate for U.S. equipment sales. This shift, accelerated by the acquisition of the Environmental Solutions Group (ESG) in 2024, has transformed Terex into a more U.S.-centric manufacturer. By localizing production for key segments like Materials Processing and Aerial Work Platforms, the company reduces exposure to tariffs and geopolitical risks—particularly in U.S.-China trade dynamics.

This domestic focus is not merely defensive; it's a proactive lever to capture U.S. infrastructure spending. The Biden administration's $1.2 trillion Infrastructure Investment and Jobs Act (IIJA) has spurred demand for equipment in waste management, recycling, and utility services. Terex's Environmental Solutions segment, which now accounts for one-third of total revenue, is a prime beneficiary. In Q1 2025, the segment reported pro forma sales of $399 million, with operating margins surging to 19.4%—a 420 basis point improvement year-over-year.

Low-Cyclical Positioning: Waste & Recycling as a Growth Anchor

While traditional industrial sectors like Aerials and Materials Processing face cyclical headwinds (sales fell 27.8% and 26.5%, respectively, in Q2 2025), Terex's Environmental Solutions business has proven its resilience. The segment's demand is driven by structural ESG trends, including municipal waste management and recycling infrastructure. As cities and corporations face stricter sustainability mandates, Terex's refuse vehicles and recycling equipment are becoming essential assets.

This low-cyclical positioning is further reinforced by the segment's recurring revenue model. For instance, waste management services often involve long-term contracts, ensuring predictable cash flows. In 2025, Terex's Environmental Solutions business is expected to contribute over $1.5 billion in annualized revenue, with margins expanding to 15%+ as scale and operational efficiency take hold.

Investment Thesis: Undervaluation Amid Megatrend Tailwinds

Despite these strengths, Terex remains undervalued relative to its cash flow potential. As of July 2025, the stock trades at a price-to-free cash flow (P/FCF) ratio of 10x, below the 12x average of its industrial peers. This discount reflects market skepticism about near-term cyclicality in its core segments, yet it overlooks the company's long-term moats:

1. Resilient Cash Flow: With $1.1 billion in liquidity and a 15.0% return on invested capital (ROIC), Terex is well-positioned to fund growth and weather volatility.
2. Strategic Flexibility: A $150 million share repurchase authorization and a disciplined capital allocation framework (prioritizing returns to shareholders and organic reinvestment) enhance shareholder value.
3. Megatrend Alignment: The global shift toward sustainability and infrastructure modernization ensures Terex's Environmental Solutions business will remain a growth engine.

Conclusion: A Long-Term Value Play

For investors seeking durable, capital-efficient exposure to industrial growth, Terex presents a compelling case. Its 108% free cash flow conversion rate, 75% domestic production advantage, and strategic alignment with low-cyclical megatrends like Waste & Recycling and Infrastructure position it to outperform in a volatile macro environment. While near-term cyclicality in Aerials and Materials Processing may weigh on sentiment, the company's financial resilience and long-term value creation potential make it a high-conviction holding for patient investors.

Investment Recommendation: Buy Terex Corporation (TEX) for a 12–18 month horizon, with a target price of $45 (implying 25% upside from current levels) based on a 12x FCF multiple and conservative growth assumptions. Investors should monitor Q3 2025 guidance for the Environmental Solutions segment and U.S. infrastructure spending trends as key catalysts.