- A recent spin-off from NACCO Industries created this new but seasoned company.
- This company outperformed its parent company while still just a segment of the parent company.
- Consistent dividend growth of the parent company will likely continue, and has in the first few years of the company's independence.
Hyster-Yale Materials Handling Inc (NYSE:HY) is one of the world's leading manufacturers of material handling equipment and was a part of NACCO Industries (NYSE:NC) until it was spun-off in 2012. This spin-off has created an interesting financial situation for analysts. There is little data that can be used to make generalizations about the company itself as it has only been on the market as a separate entity for a year. However, it is possible to project where the company is headed based on its roots at NC. By looking at the tendencies of the NC management we can draw conclusions about how the HY management will act in lieu of substantial data. This of course is based on the assumption that HY management shares similar business practices to that of the original company.
The materials handling industry is growing worldwide with increasing investment in infrastructure and non-residential construction projects. In the BRIC countries alone, infrastructure spending is projected to exceed 4 trillion USD through 2017 with 145.3 billion in revenue projected for construction equipment and handling equipment industry in 2015. The industry is dominated by Toyota Industries and Kion Group, each at least twice as large, by revenues, than the rest of the major players in the industry.
The expansion of new non-residential construction will also drive the demand in the market demand for material handling equipment. The recovering world's economy should again help sustain organic sales growth for the company. The United States being a key market for the industry shows promising expected growth and should continue to grow for the foreseeable future based on the positive trend.
However, the primary revenue stream in this market is not from new sales but the parts sold to maintain the capital intensive equipment. This means that companies aim to have a high level of active products worldwide, thus expanding their replacement parts market.
The company in question is attempting to position itself in the market with low cost of ownership for its customers and focusing on expanding into the Asian markets. The Asian markets are obviously attractive to all major industry participants, but it is important for the company to recognize the opportunity in the emerging Asian economies and capitalize on the growth that the region is experiencing. Even given its smaller market share when compared to its rivals, if it can maintain similar market share in the Asian markets, then sales will grow with the economies despite not being dominant. The company has set up its manufacturing and logistics system to take advantage of economies of scale by centralizing manufacturing in each region where the company does business. This supply chain strategy should allow the company to improve its operating margins from 5% to the company's goal of 7%. There is evidence that, as the world's economy has recovered and the materials handling market grows, operating margins have improved. A slight but definite improvement in margins is evident from the graphics below. Given the optimism for the industry's growth, similar optimism should follow the operating margin.
Source: Google Finance
Healthy cash flows and reduction of long-term debt make the financial statements of this company a significant strength. Equally promising is the steadily increasing diluted earnings per share, which has risen almost 15% since the spin-off and over 200% since 2010, while it was still part of the original company. HY has been steadily paying down its overall debt since before the spin-off and will likely continue its low debt trend. With respects to the cash flows, the year of the spin-off from NC, there was a net decrease in cash, it is likely that a portion of this loss can be attributed to sustaining the paying down of debt but due to its new found independence, no longer had other sources of income to pay its debt from other business segments within NC. However, in the most recent full year that data has been collected, there has been a significant rebound, back into positive cash flows by a margin of 24.4 million, primarily through increasing operating cash inflows and partially by reducing financing cash outflows.
Very recently, within the last few months, HY stock has dropped off, in part due to insiders selling off their stocks and in part due to the market downturn at the beginning of August. The company's net income is still on par with the previous corresponding quarter in 2013. This would indicate that nothing has fundamentally changed the company in the short term and the stock should make a partial rebound with the next earnings statement. With this in mind, HY is currently being sold at a discount being slow to recover from the market dip. The company also recently declared a .28 dividend, consistent with the historic dividend growth of the original company. A word of caution, NC has a very high beta, 1.86, while HY has not been on the market long enough for a beta to be calculated. It would be prudent to assume a similar beta and thus a similar amount of volatility. If a dividend portfolio needs some diversification for added returns, this companies solid financials imply a solid investment for a long term or short term dividend focused investor.