Manitowoc: Negative Catalysts Outnumber Positive Ones

| About: Manitowoc Company, (MTW)
  • Company: Manitowoc (NYSE:MTW)
  • Currently trading at: $13.50
  • Potential downside: $3.50
  • Market Capitalization: $2.3B
  • Shares Outstanding: 131M
  • Industry: Capital Goods, Machinery
  • Situation: Highly leveraged post-M&A situation making MTW a high beta stock
  • Probable timeline: 6 to 12 months

Everyone on Wall Street is modeling for an uptick in MTW's Crane business, and remains bullish on the company. However, numbers tell a different story.

What are the catalysts for the down move?

  1. Expiration of accelerated depreciation tax laws in Dec. 2011 might lead to a further decline in the Crane Segment (55% of total revenue) backlog. The uptick in the Crane backlog in Q1 was partly due to this tax law giving temprory uptick to the shareprice. This law expires in 6 months.
  2. High leverage (5x debt/Ebitda; 1x interest coverage ratio), will put pressure on MTW earnings due to high interest expense and a high level of debt.
  3. Slowdown and increased competition in MTW's biggest Crane growth markets of China & Brazi that will lead to a decline in crane segment operating margins (already declined from 8.2% in 1Q-09 to 2.7% in 1Q-11)
  4. New sales as opposed to renewed contracts generated 83% of Crane Revenue. Crane has 50% exposure to residential & commercial construction and road sectors. Government spend and consumer spend, the main drivers for roads & construction to which Crane is 50% exposed, are expected to decline further.
  5. Volatile FCFE (negative in 4 of the last 9 quarters): FCFE excluding borrowing for 1Q-11 is negative $162M, compared to negative $77M for 1Q-10
  6. Steady decline in capex: MTW generates just enough cash flow to cover debt expense and some more. In the event of a market downturn in addition to expiration of tax law by Dec. 2011, MTW's stock might see a significant decline.
  7. One of the historical growth strategies for MTW has been growth via acquisitions. Debt covenants due to high leverage will discourage MTW from following an acquisitive strategy, and further hamper its growth prospects. As of March 31, MTW's Consolidated Senior Secured Leverage Ratio was 3.02x, while the maximum ratio dictated by its covenants under the credit facilities is 4.50x, and its Consolidated Interest Coverage Ratio was 1.94x, above the minimum ratio of 1.50x.
  8. The closest competitors trade at 1.14x P/B and 0.66x P/S, vs. MTW's 4.3x P/B and 0.77x P/S.

Potential positive catalyst

  1. MTW's Foodservice Equipment business, which constitutes 45% of total revenue. It has reported steady increase in operating margins and revenues.
  2. A potential spin-off of the Crane business or separation of two segments namely Crane & Foodservices, might unlock shareholder value. However, management might not be inclined to do so.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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