Anyone who has entered stock screeners lately looking for cheap undervalued and beaten down stocks has probably run into their share of machinery and construction related stocks. Caterpillar (CAT), John Deere (DE), Terex (TEX), Manitowoc (MTW), Ingersoll-Rand (IR) to name a few. They all have the same things in common sub 10 Forward P/E’s, minuscule P/S, and they are all down over 50% from their 2008 highs. They all beg the question of when are they just too cheap not to buy and hold?
One stock that still doesn’t look ready to be bought is Manitowoc. MTW is a maker of cranes and also has an expanding food service business. The latter was recently boosted with the $2.7 billion acquisition of Enodis PLC that completed on 10/27/2008.
MTW released earnings after the close on Wed. Jan 28th and since than has been down four straight days and fallen 27% going from 6.84 to a recent 4.95. MTW reported full year earnings of $1.32 on $4.5 billion of sales, and on the company's call was forecasting $4.9 billion of revenue and $1.35-1.60 in EPS for 2009. The company was also quite optimistic in its language and spoke about strength in its core businesses, achieving synergies, and overall being well positioned to survive the current global gloom. This is in contrast to Caterpillar's quite dire 2009 outlook. (Thoughts of mine on CAT's earnings and outlook can be found here).
Taking into account the lower estimate of $1.35, MTW currently trades at a minuscule 3.67 Forward PE, so obviously the market isn't buying into MTW's rosiness.
The biggest concerns for 2009 are a decrease in revenues in the Crane Division and the $2 billion in debt the company took on to purchase Enodis. Additionally, there is balance sheet deterioration as inventories and accounts payable have continued to grow, to a current $925 million and $1.2 billion respectively.
Regarding the crane business, MTW expects a 20% decrease in sales. The big worry is that cancellations, which are already hitting the backlog, will increase and a further revenue decrease will occur. Also, if MTW does maintain its sales goal, it may be at the expense of lowered prices which will sacrifice earnings and could lead to a write-down of inventory value.
An earnings loss, or write-downs, could then adversely affect MTW's financial strength and lead to debt covenant violations.
In its defense, MTW set a billion $ debt reduction goal for the year based on sales of assets, inventory-runoffs, and usage of cash flow.
The bottom line is that MTW doesn't need to hit its EPS goals (no one other than MTW seems to think it will) for 2009 to be successful, but the company does need to show that it can handle the increase of debt and be able to decrease its inventories. Until then, buying MTW is purely speculative and not value buying.