232 The Business of Value Investingparticipants to abandon ship at the fi rst sign of trouble. As a result,
the potential for share price appreciation can be signifi cant when
the market wakes up to the future profi tability of the business.
As the environment faced oil refi ners, Tesoro and Valero, in
2001 (see Chapter 7), many industrial and manufacturing busi-
nesses in 2009 continue to face one of the worst economic down-
turns in recent memory. It should come as no surprise that Mr.
Market is focusing on the immediate short term and ignoring all
else. For example, Terex, a U.S. manufacturer of construction and
mining equipment will very likely report a net loss for the 2009 year.
This poor performance is an industry-wide problem as end custom-
ers for companies like Terex are delaying and canceling orders.
Some of Terex’s business divisions are experiencing sales decline
in excess of 50 percent. Management continues to be candid with
shareholders by telling them that 2010 may also be a very diffi cult
year for the industry. As you might imagine, shares in Terex have
fallen off a cliff.
In March of 2009, shares were fetching $8; a year earlier the
stock was north of $70.^4 In 2008, Terex earned $5.33 per share, likely
a result of a peaking business cycle. However from 1999 to 2008,
Terex has earned an average of $2.35 according to Value Line. This
period includes both economic growth and contraction. So far, Terex
management has succeeded at steering the ship during the storm.
Anyone who believes that, at some point, the economy will improve
and the need to build and repair infrastructure will pick up can bet
that Terex will again start earning profi ts. At the then current price
of $8, shares were trading for less than four times the average 10-year
earnings and less than two times the average 4-year earnings.^5Book Value: More Than Meets the Eye
The book value of a business is defi ned simply as the net assets
of a business. It ’ s the value left over to the stockholder after all
obligations are paid off. Book value also can be referred to as the
equity value of a business.CH011.indd 232CH011.indd 232 9/2/09 11:51:53 AM9/2/09 11:51:53 AM