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Mining Boom Pumps Up Terex

Tire-sale trends show demand for earth-moving gear is still huge.

Rising demand for giant off-the-road tires suggests there's more upside for the makers of jumbo-sized earth-moving equipment such as


(CAT) - Get Caterpillar Inc. Report



(TEX) - Get Terex Corporation Report


The two stocks have rallied more than 50% and threefold, respectively, over the past two years on the back of the commodity-price boom as mining companies have snapped up every available digger and truck that money could buy.

But so lucrative has been the business of extracting metals and minerals that manufacturers of mining equipment can't make enough of the vehicles. Waiting times have stretched to two years for even the best customers and even longer for those not buying fleets of the multimillion-dollar earth-haulers.

At least part of the problem has been a dearth of OTR tires, which stand up to 12 feet tall and sell for as much as $50,000 each.

"The demand is there, but if you don't have the parts, you can't deliver the final product," says John Kearney, an analyst at Morningstar in Chicago. More specifically, trucks without tires, for the most part, aren't a feasible answer.

Kearney points to Terex's burgeoning order backlogs, which shot up 56% companywide in the first quarter vs. a year earlier. The increase was driven in part by mining-segment backorders, which more than doubled.

Caterpillar concurs that tires are part of the problem for truck production and confirms it is sold out through December 2007.

But industry insiders are now saying there's relief in sight.

Operational efficiency improvements alone could help boost annual OTR tire supply by about 3% this year, explains Gary Nash, director of OTR tire sales at Yokohama Tire in Fullerton, Calif.

Meanwhile, looking further out, some of the major manufacturers have made plans to grow their facilities or build new ones. For instance, in February,


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pledged to invest $600 million to boost OTR capacity by 20%, according to the

Modern Tire Dealer

, a trade publication.

Typically, 30% of new tires go to original equipment manufacturing with the remainder designated for replacements, says Yokohama's Nash. Based on his estimates, the 3% operational unit gains equates to about 20,000 extra tires. If 6,000 go for new trucks and with estimates that vehicles will sell for $2 million to $5 million each, the additional tires could add $2 billion to $5 billion to industry sales, assuming six wheels per truck.

It's clear that not all of the output constraint is down to the lack of tires -- at least some is due to chronic underinvestment. But just the same, some of it


due to tires, which means that as more tires roll onto the market, Terex and Caterpillar will bag easy incremental sales.

And the supply response from tire makers could auger other operational efficiencies winding their way through the supply chain.

"For Terex, it's probably enough to move the earnings needle," says Morningstar's Kearney, who adds that the stock is attractively priced at $80, below what he considers fair market value of $86. But with the firm's very late-cycle mix of products and good earnings growth, the stock could have a lot more upside.

Likewise, others see profit potential in owning Caterpillar.

With Caterpillar, "the price of the stock tends to move with the earnings, not ahead of it," says Alexander Blanton, an analyst at New York-based Ingalls & Snyder. He projects earnings of $5.85 a share in 2007 and $6.75 in 2008, which is at the high end of the range from Wall Street analysts.

Blanton says the stock has typically peaked at a price-to-earnings ratio of 14.5. If that relationship repeats, then the stock could be worth close to $100, vs. about $76 recently, and that doesn't count the two to three more years of good earnings Blanton spies ahead.

Other analysts are somewhat more cautious.

Baltimore-based Stifel Nicolaus downgraded Caterpillar's rating to hold from buy Thursday.

"Any more oil price strength, as in the 1970s, may be destructive for the rest of CAT's business now as it was 1977 to 1981," writes Stifel analyst Barry Bannister.

Even with that caveat, Bannister says Caterpillar's stock is worth $81, almost 10% above the current share price. Part of the reason for the downgrade may be chalked up to Stifel's policy of restricting buy ratings to stocks likely to outperform the

S&P 500

by more than 10% inside 12 months.