In this article, I will run you through my DCF model on Manitowoc (MTW) and then triangulate the result with an exit multiple calculation and a review of the fundamentals compared to Caterpillar (CAT) and Deere (DE). I find that Manitowoc may either precipitously fall or significantly appreciate. Given this risk, investors should consider backing Caterpillar, Deere, or both.
First, let's begin with an assumption about the top-line. Manitowoc finished FY2011 with $4.1B in revenue, which represented a 16.2% gain off of the preceding year. I model growth trending from 13% to 10% over the next half decade or so.
Moving onto the cost-side of the equation, there are several items to consider: operating expenses, capital expenditures, and taxes. I expect cost of goods sold to eat 77% of revenue versus 15.5% for SG&A and 1.5% for capex. Taxes are estimated at around 30% of adjusted EBIT (ie. excluding non-cash depreciation charges to keep this a pure operating model.)
We then need to subtract out net increases in working capital. I expect this figure to hover around 0.1% of revenue over the projected time period.
Taking a perpetual growth rate of 2.5% and discounting backwards by a WACC of 9.5% yields a fair value figure of $13.70, implying the market is basically correct. The problem with DCF models, however, is that they can often be sensitive to the various discount rates. This is admittedly the case for Manitowoc. My sensitivity analysis that considers a variety of perpetual growth rate inputs and discount rates indicates a standard deviation of $3.82. This is a whopping 27.9% around the intrinsic value. A discount rate of 11% would send the shares falling 36.2%.
All of this falls within the context of strong performance during a challenging business environment:
"We are pleased to report strong fourth quarter results that marked an end to what was truly a transitional year for Manitowoc in 2011, culminating with impressive year-over-year sales growth of 25% in the fourth quarter. Despite some unexpected turbulence during the year, our focus on execution, coupled with continued progress against our strategic initiatives, helped us reach most of our full year 2011 expectations. In fact, both of our industry-leading businesses delivered higher year-over-year sales and operating earnings, a testament to our ability to navigate an increasingly uncertain global economic environment and fluctuating demand levels that lingered across our markets for a large portion of the year".
We can better discern the fair value of Manitowoc by looking at the multiples compared to the DCF result. The company trades at a respective 67.3x and 8.7x past and forward earnings versus 14.3x and 9.4x for Caterpillar and 12.2x and 9.6x for Deere. Assuming a multiple of 12x and a conservative 2013 EPS of $1.45, the stock would surge by nearly 30%. In short, there is substantial leeway in were the company can go. But given the large spread between past and forward multiples, I believe the bull case is stronger than the bear case.
At the same time, why take on this risk when there's Caterpillar and Deere? Consensus estimates for Caterpillar's EPS forecast that it will grow by 28.5% to $9.51 in 2012 and then by 19% and 17.8% in the following two years. Assuming a multiple of 12x and a conservative 2013 EPS of $11.23, the stock would hit $134.76, implying 27.3% upside. Analysts tend to love the stock, so the wind is certainly in favor of Caterpillar. From the attractive brand to global penetration opportunities, Caterpillar has a very strong risk/reward profile.
Consensus estimates for Deere's EPS forecast that it will grow by 21% to $8.02 in 2012 and then by 6.2% and 3.9% in the following two years. Assuming a multiple of 12x and a conservative 2013 EPS of $8.46, the stock would break $100 and surge more than 24%. Deere and Caterpillar both dwarf Manitowoc. Normally, I like to root for the underdog due to the opportunities for higher risk-adjusted returns. But, this time, I find that the risk is just not worth the reared when there's Caterpillar and Deere.
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