On Monday, September 10th, Manitowoc’s Chairman and former CEO Terry D. Growcock gave a wonderfully bullish presentation on global construction and infrastructure growth.I’ve been meaning to discuss Manitowoc for some time after I started a position in it a couple of months ago, but Mr. Growcock (obviously) does a much better job of telling their story, so I’ll try to follow his lead here.
For those who don’t know Manitowoc, this is the company: Manitowoc is primarily a lifts play (big machinery such as cranes, booms, and lifts, often attached to trucks) with a smaller business in food services (refrigerators, soda dispensers, etc) and a marine business (building and repairing military vessels and commercial transport vessels for use on the Great Lakes and St. Lawrence Seaways).
The crane and lifts business, accounting for 76% of revenues and 81% of earnings in 2006, is the reason I bought Manitowoc. The simplest way I look at the booming (no pun intended) demand for cranes and lifts is that people are tiny, but we want to build big things. Anything bigger than a house or heavier than a couple of pounds, we need cranes to move them. Thus, Mr. Growcock confirmed the downturn in U.S. housing actually won’t affect Manitowoc’s business, since Manitowoc is more exposed to the commercial construction business.
Furthermore, Manitowoc is a global company, with 60% of its crane’s business coming from overseas; Manitowoc is the only Western company to have its own crane factory and presence in China. Make no mistake, Mr. Growcock admits that while Manitowoc only has 1 or 2 global competitors in the crane’s business, there are a lot of local and niche players. However, this is a rising tide that lifts all boats.
All aspects of the global buildout (not just commercial buildings) require cranes and lifts: commercial construction (23% of MTW’s revenues), industrial/petrochemical (21%), residential construction (21%), road & highway (13%), power plants (12%), utilities (6%), and manufacturing (4%). Of these, only North American residential construction, only a part of the residential construction, is a drag. All the other industries can be considered high growth. Manitowoc’s 2007 investor fact sheet cites the following trends:
The North American construction upswing is expected to last through 2009. A number of factors drive this: an anticipated 9% increase in nonresidential construction in 2007 (Source: FMI Corporation); the passing of a US bill that represents $284 billion in construction spending for highways, energy, and mass transit over the next six years; crane rental firms purchasing more equipment; companies replacing the 15,000 crawler cranes that are 25 or more years old. Emerging markets have a strong outlook for compound annual growth in their construction industries from 2005-2015: China at 19%, Russia at 17%, India at 11%, and Brazil at 10% (Source: Global Insights).
Demand in the European market remains stable, with most construction opportunities in Germany, France, Italy, the United Kingdom, Spain and the Netherlands.
Both supply and demand are working in favor of the crane and lifts industry. There is serious supply shortage as cranes were underproduced in around 2002, while old cranes are all rented out and will need to be replaced soon due to aging. Crane order times have jumped from 2 months to at least 6 to 8 months. Meanwhile, used cranes are still going for 90% of the original value and new cranes take some 15-24 months to manufacture. Finally, cranes are used on current job sites anywhere from 6-18 months, and 18-36 months for longer projects.
My two main takeaways from these time frames are:
Increasing demand and a dwindling supply of cranes is causing an acceleration in earnings for crane manufacturers and renters. Manitowoc does both. Mr. Growcock has confirmed that they are able to maintain profitable prices on their cranes without complaints from customers (as the customers are likely desperate to get anything). The global boom is long and strong. With project and lead times of around a year, this is a long-term growth investment. You would be able to see the slowdown coming and get out before it happens. This is not a short cycle like tech used to be (but I don’t think is anymore either). As long as engineering and construction firms like Foster Wheeler as well as oil service companies like Schlumberger continue to have gigantic backlogs further out than it takes to get a crane (in other words, backlogs of projects visibility of more than 6-36 months), we can continue to ride the crane growth wave.
After Mr. Growcock’s bullish comments, I believe we can start building a long term position in this stock on weakness below $80, and we should get many chances in this volatile market. Short term volatility should play to our advantage to build positions in solid growth stories.
The final piece of this puzzle (which I believe can provide extra upside in Manitowoc’s earnings) is that high quality steel prices, the main cost component for cranes, has a near-term peak. China officials have noted an abundant supply of steel that must be worked off in the short term, despite strong demand. Thus, I believe steel and commodity prices relevant to crane producers should remain flat and thus reduce pricing pressure on crane producers.
Terex (TEX) has a slightly different business portfolio than Manitowoc, but they have a substantial crane and lifts business alongside mining equipment machinery similar to Caterpillar’s (CAT) business. You may want to check out Terex to compare as the positive factors mentioned here for Manitowoc applies to Terex as well.