Manitowoc Offers Investors Growth at a Discount

Shares of industrial crane powerhouse Manitowoc Co. (MTW) [27.02] have been on a slippery slope ever since rumors of a deal to acquire Enodis surfaced. Following confirmation of the rumors, and an announced deal at $2.4 billion, Manitowoc shares are 47% off of their 52-week high. Despite all this, Manitowoc had been reaffirming guidance throughout the decline… insisting that higher input costs would be offset by surcharges on shipments dated after June 1st. But investors simply never regained confidence in the company.

Manitowoc completely silenced all fears with a record-breaking earnings release on July 28th, 2008. Despite less than stellar showings from industry peers Oshkosh (OSK) [18.77] and Rockwell (ROK) [45.42], Manitowoc managed to blow away consensus estimates of $0.89 with a second quarter showing of $0.99. Earnings were up 37%, lifted by surging oil prices that prompted increased spending on projects requiring Manitowoc cranes. To go along with impressive numbers, MTW raised the midpoint of their full year earnings forecast by $0.10.

Manitowoc is trading at a steep discount to its peers and its historical premium; shares haven’t improved, even after fantastic earnings & reaffirmed strength, and the fears are clearly overdone.

All About Manitowoc and Business Segment Drivers

Manitowoc’s forte is certainly their best-of-breed crane business. Specializing in heavy-lift cranes that are arguably the best in the business, their revenues span across the globe with 45% of sales coming from overseas. MTW has proven resilient to global trends, evolving from a company with 95% of sales concentrated in North America to a global powerhouse with less than 8% crane sales deriving from domestic construction. Just about 45% of their portfolio stems from demand amongst utilities, petro-chemical plants, nuclear plants and roads & highways. This portfolio clearly outdoes their main competitor Terex (TEX) [49.37], as long-term demand visibility and best-in-class consumer ratings have shown time and time again that Manitowoc is the premier industrial crane provider.

Aside from the crane business, Manitowoc is largely exposed to the food service industry as one of the world’s most respected brands for beverage dispensers and ice machines. Clearly, MTW is placing a big bet on the sector with the recent planned acquisition of Enodis. While I don’t openly back the move, there are certainly many advantages of the merger. For one, the acquisition will allow them to become a full-service provider of commercial food preparation. In addition, the combined company will be able to more openly pursue global manufacturing and profitable growth opportunities.

The third leg of Manitowoc’s business is in Marine Services. They operate three profitable shipyards and have been actively designing and constructing military and commercial vessels. With a 6.0x multiple in the segment, they have strong bookings and increased efficiency despite a niche focus on the Great Lakes area.

A Mispriced Manitowoc? Enodis Creates a Value Play

It is my view that the news leading up to and immediately following the deal with Enodis has completely traumatized shares of Manitwoc beyond where they should reasonably trade. Because there were essentially two periods of investor fear: 1. rumored acquisition 2. confirmed acquisition, this stock suffered twice for a merge that will actually be yielding synergies by 2009 and be EVA positive by 2011. With this in mind, Enodis enjoyed sales of $1.6 billion for the fiscal year ending Sept. 30th, and all of their products are number one or two in their respective markets.

Knowing that the deal with Enodis will be much more profitable than the drop in share price would suggest, Manitowoc’s crane business alone has been projected to exceed the value of the entire company. Couple this with a powerful backlog of $3.5 billion, about the size of the entire market capitalization of MTW, and you have one undervalued growth play that has been hit in a way that completely over-compensates the acquisition of Enodis. Furthermore, the share price incorrectly links consumer reports of decelerated industrial production with Manitowoc’s ability to grow, a factor that has proven once more to be independent of these issues. Management reaffirmed MTW’s strength on July 28th, and demand has never been stronger.

Valuation P/E (ttm): 8.73x Forward P/E: 6.96x PEG: 0.09x 1 year EPS Growth: 97.35% 5 year EPS Growth: 45.31% Return on Investment (1 yr): 23.55%

Historically, Manitowoc has traded at a premium to its peers, and this holds true in today’s market. When you consider the cyclical Crane Cycle, the last time MTW was in a trough in the charts (2003) they traded with an estimated 8.8x EV/EBITDA. At the same point in the cycle today, we are sitting at a dirt-cheap 5.0x 2008 EV/EBITDA.

Manitowoc vs. Terex

Manitowoc’s crane business duels primarily with Terex in the niche area. Sure, there are the larger portfolios seen in Deere (DE) [73.47] and Caterpillar (CAT) [72.07], but if we are comparing apple’s to apple’s for a value play, we need to look toward Terex. Though TEX currently carries a P/E ratio lower than Manitowocs at 7.00x, there are fundamental reasons I believe MTW is the better deal.

First of all, Terex cannot match Manitowoc’s triple threat global footprint, brand recognition and CraneCare service. In fact, their Service & Solutions business is the best in class and drives a lot of demand for their cranes. Furthermore, Manitowoc’s heavy-lift crane portfolio is really a hidden gem that outperforms other producer’s attempts. Finally, a big concern that gets unfairly attributed to Manitowoc’s business is the ongoing problems with commercial construction. Terex has a big exposure to this segment with their Aerial Work Platforms unit, while Manitowoc is more concentrated in emerging markets and non-residential construction, both of which are two still-thriving end markets.

Closing Argument

At less than $2/share off a 52-week low, there is absolutely no reason in the world that shares of Manitowoc should be trading at such a discount to their historical premium. An over-reaction to a deal to acquire Enodis, it would appear that MTW is simply too cheap to pass up. With a better product portfolio and services unit than main competitor Terex, I mark MTW as the best of breed industrial crane producer.

 

“Manitowoc is a global company and operates a diverse set of businesses. While it’s impossible for any company to be completely immune to recessions and cyclical downturns, the strategic actions that Manitowoc has taken during the past eight years were designed to make us far less vulnerable to the changes occurring in any single geographic area or industry…Our strategies are both sound and proven. More importantly, despite the current state of economic uncertainty, 2008 will be our best year of financial performance in the 106 year history of Manitowoc.”

- CEO Glen Tellock

 

Manitowoc was a typical play on infrastructure and agriculture markets for investors. I am currently overweight both sub-industries, but a lot of investors have fled since a deal with Enodis would dilute their exposure to these markets. While I don’t necessarily disagree, the reaction was harsh and undeserved. Pick shares up while they are still cheap and watch for a 12-month price target of $43/share.

Disclaimer: The author currently holds a position in DE as a part of his personal portfolio.

Comments

[Frugal2000:]

It's too good to pass by. Other than Enodis deal, what would be the negative aspect in this company? Market would know something that I don't know.

2008 Jul 31 06:16 AM

[stvcomment:]

Your comparisons with TEREX are weak and have no basis in fact. TEREX is also way undervalued. In my opinion the comparisons to make your point would have been better vs Deere or CAT

2008 Jul 31 07:45 AM

[fxtrader07:]

interesting article though i wonder why with all these positives the author holds no shares of the company - but instead of DE?

2008 Jul 31 08:41 AM

[DaveinHacke...:]

Although the company now has a surcharge to offset high steel prices, I don't believe this surcharge applies to orders in Manitowoc's multi-billion dollar backlog. That would be a concern for me: the company sold giant cranes for $X when the cost of the needed steel was $Y; now it has to build those cranes when the cost of steel is $2Y. Normally, a large backlog of business is a bullish indicator, but here it's something of a liability, since MTW's CEO has said the company doesn't renegotiate the contracts in its backlog.

2008 Jul 31 11:38 AM

[mags:]

I would have to agree with stvcomment. Your comparisons with Terex could have been much better. While I think that DE, TEX and MTW are all great buys, I definitely like TEX much better. TEX has more product breadth and depth and are not considered just a "crane" company. They also derive approx. 50% of sales from outside the US, are trading at much more of a discount.

2008 Jul 31 12:33 PM

[Stephen Ros...:]

wonderful company doing something stupid and paying a big price for it both in real dollars for Enodis and stock price. This is a little company going off on a very big gamble buying an over priced business. First MTW paid with weak dollars for an English company in a bidding war and won over ITW (lost over a billion in market cap by doing so). Second it's going to take alot of work (and debt) to make it all work. Three the food business is not all that sexy; look at how weak MTW food division was this quarter. If they stayed with cranes and grew the rest of the business organically and with small tuck in acquisitions, they'd be at 50; instead, down they go.

2008 Jul 31 02:57 PM

[davemcc3300:]

MTW may be a good stock again, but the diversification into food prep machinery takes management's eye off the ball.

Nothing's wrong with being focused, as GE's finding out. With raw materials costs dragging down the foreseeable profit picture, I bailed out ...unfortunately not until MTW slid down to $27.85, representing a 29% loss on my investment.

The diversification with Enodis' commercial foodservice and food processing equipment was also in direct conflict with my heavy investment in The Middleby Corp (MIDD), which is the biggest food equipment company in the world. MIDD is aggressively going after market share and -- though I'm getting a thrashing by the stock market on my MIDD shares too -- I think the Enodis purchase puts MTW's into a margin-punishing marketplace. I think MTW will be slaughtered.

So is it really such a good value? I don't see it that way, but plan to keep watching MTW. The Enodis business may find a safe niche and let MTW refocus on making the crane business a Terex-killer in the market. I still like MTW in cranes.

But if I was looking for a conglomerate, I'd go back to GE.

Then again, I probably wouldn't go back to GE.

2008 Jul 31 07:56 PM

[dancingdiva:]

Several faults with your argument.
1. If it was just Enodis, why did both MTW and Tex fall by the same amount over the past two months? My bet it was fear of a global slowdown combined with overall market weakness.
2. Your comparisons to Terex is very faulty. While I agree MTW is the king of cranes, Tex crane sales and earnings over the past two quarters rose more than Mtw's on a percentage basis. Additionally, Tex has an aftermarket service, but doesn't highlight it the way MTW mgmt does theirs. It's obvious by the numbers Tex hasn't suffered in comparison since their margins are growing faster.
3. You say MTW has a greater global exposure, but in 2007 Tex non-US sales were 70% vs Mtw's near 50% (their 2007 report said 53% for "the America's").
4. You neglect to mention Terex' booming mining business that has so far more than made up for the small decline in their AWP business.

I realize your aim was to promote Manitowoc. Yet, your homework and research against what you consider their main competitor was extremely poor. Additionally, your primary thesis that MTW is just being punished over Enodis is outright incorrect since both companies fell by almost the exact same % prior to Tex mgmt's buyback announcement.

Over the past week, both in this weeks Barron's and today on CNBC two different people commented Terex didn't get any respect. It's shoddy research like this that contributes to that opinion.

2008 Aug 01 03:40 AM

[dancingdiva:]

Frugal2000 - The biggest drawback to Manitowoc right now is what happens if there is a significant global slowdown. Assuming no asset sales, like their Marine division, they will be taking on debt equal to two-thirds of their pre-Enodis market cap. In this environment that's a risky proposition.

I've always liked Manitowoc; it's a great company. In fact I owned shares in the company until May, when my concerns over the global economy combined with the Enodis debt prompted me to sell. Right now I prefer Terex, although it too could be dead money in a global slowdown. Both stocks are cheap, but Tex has the added advantage of smaller debt and a huge buyback.

2008 Aug 01 04:08 AM

[User 218471:]

People that think that Manitowoc didn't fall because of Enodis are out of their minds, it's pretty obvious to anyone looking at the headlines and the stock chart.

To answer the question that I don't own MTW right now, I am just long the stock and don't have any free cash to make an investment... no fault for owning Deere!

Terex has it's own problems. The fact that you are justifying that Terex fell by the same percentage as MTW would imply that you think the stock deserved a 0% hit from acquiring Enodis. The fact that they sold off the same percentage while Manitowoc acquired a major company and Terex did not simply speaks my case further for MTW... as investors obviously feel that it is a strong company underneath.

Again, I never bashed TEX... which I think is a solid company. I believe that TEX is a shoddier company than MTW and people looking solely at figures will never understand that. This article is about MTW, so there is only reason for me to compare and determine relative strengths versus Terex rather than try to recommend both companies for purchase.

As davemcc said, they did in fact take their eyes off the ball with Enodis. I totally agree, but I am arguing the fact that the reaction was overdone, thus leaving the underlying company severely undervalued for their growth. Any debt left about can and will be delt with at a later time, a bad D/E ratio isn't the end of the world... and people need to realize this.

Thanks for the commentary, interesting points of view here.

2008 Aug 03 01:22 AM

[dancingdiva:]

And I am saying growth is a hindsight phenomena. Take a look at past cyclical downturns and how far earnings could fall and then tell me debt doesn't matter. Recent world statistics have been showing a major slowdown in most regions of the world, and since the inflation and high interest rates felt by most economies are a relatively recent phenomena, the statistics have yet to catch up to how slow the economies may get.

Putting money into this sector, whether it's Manitowoc, Terex, Caterpillar, etc may be the smartest move in the world if economic conditions don't deteriorate further, but everything I see tells me caution is warranted. This reminds me of the debate on how cheap housing stocks looked after they began their descent, when prices peaked a full year ahead of revenues.

And taking on a high debt load at what may be the top of the cycle leaves them in a more precarious position and unable to take advantage of the bargains which may emerge.

Whether prices move even lower and all negative news is priced in is debatable; but I've caught a "falling knife" in the past only to see earnings deteriorate and prices move even lower. I don't think there is anyone who hasn't fallen victim to that phenomena at least once. So perhaps I'm overly cautious.

2008 Aug 03 08:05 AM

[Stephen Ros...:]

I used to own MTW but sold it at 40 with announcement buying Enodis. Each time the investing public learned more about the deal and the bidding war, MTW dropped. I sold at 40 and shorted it to 26 where I covered. Any foolish bump up and back to shorting I'll go. A small company buying a fairly equal sized company in a slower weaker margin business = awful share price. What is management thinking??????????????...

2008 Aug 03 06:55 PM

[themacrdjmjb:]

This article was a embarrassing. You clearly are not familiar with the crane market. No mention of Liebherr, (although they are private) THEY are a MAJOR competitor overseas and they are not the only one.
You did not mention market share of particular crane segments which is incredibly important in the international markets,
If you are going to write an article on the crane industry, do some research.

2008 Aug 04 07:32 AM

[craneexpert:]

The quote by themacrdjmjb is right on target. I am a former factory employee of the manufacturer Liebherr Crawler Crane plus other worldwide crane manufacturers. Liebherr is their biggest competior in terms of quality but Manitowoc has produced superior products for 106 years as well.
Bullish bankers is also correct in his assertion that Tex is 'shoddier' than MTW in all aspects and dacingdiva's comments on Tex 'aftermarket' service is way off the mark. Having purchased Tex cranes, I will assert that they do not have nor have they ever had aftermarket service that could compare to MTW or just about any other crane manufacturer in existance.
After puchasing 3 cranes from Tex in 2006, they were completely rusted through to the undercarriage with the boom cylinders rusted and pitted within 8 months of purchasing new. The contractor ordered them off the job (for safety reasons) before the warranty was up. Contacting Tex's head of 'customer satisfaction' produced absolutely no results.
Tex uses the 3 lowest bids to choose vendors to puchase steel and other materials necessary for production. Buying low quality, cheap steel will result in manufacturing problems like those mentioned above. The only reason Tex has had sucess in this arena is because of 'availability' created by an extreme shortage of cranes worldwide.
Had dancingdiva done the research, then the realization that Tex's 'global exposure' of 70% is due only to aquisitions would occur. As far as Tex mining division, Liebherr Mining trucks are nearly double the size of their nearest competitor.
Being a retired crane operator, senior sales executive for the most prestigious crane manufacturers, and now a consultant for the world's largest investment firms, I can offer my opinion from the position of actually 'being in the seat' operating the cranes, sales and aftermarket service (or lack thereof), and investment enquiries. The overwhelming majority of investment enquiries/opportunitie... are for MTW. The only enquires into Tex concern their aquisitions.

2008 Aug 23 04:23 PM

[LE:]

so is MTW a good buy, now that it's at 2.50?

Mar 07 06:47 AM

[LE:]

I answered my own question of Mar 7 and bought (a lot) around 2.75, and then sold around Aug 24 for 7.10 (can't complain). I was happy to see it then go down to low 6's, but then was dismayed when it shot up to 9 last week. I keep track of my "lost gains from too-early sales" and its one of my worst decisions after APWR and ASH. So, why did I sell?
1. I was troubled somewhat that the company's balance sheet has 600M negative equity after removing goodwill (but leaving intangibles), while market cap got to 1B. I like to buy stocks that trade at a discount to tangible book.
2. Some (not a lot) of concern about debt levels.
3. A feeling that they sold a whole LOT of cranes in 2005-2008, and that many of those cranes are idle, so that when the economy picks up, it will be the idle cranes put back to work, and not a lot of sales of new. On the food-service side, a feeling that a lot of restaurants will have gone out of business and produce a steady supply of cheap used food-service equipment.

But what I am focusing on now is what kind of earnings can this company expect in 2011? Investors will probably start to formulate those expectations over the next 2Q, so by mid-2010 MTW's price will likely build in expectations for 2011. If $2+ EPS is be reasonably expected for 2011, then this is probably a $20 stock by mid-2010.

Comments or opinions?

Disclosure: no MTW position at present


On Mar 07 06:47 AM LE wrote:

> so is MTW a good buy, now that it's at 2.50?

Sep 13 09:02 AM