Manitowoc Co. Inc. (MTW) is a world leader in the manufacture of construction cranes, and will soon be one of the world's largest foodservice companies. Does a P/E ratio of 9 and a forward growth estimate of 30% per year sound interesting? A look at Manitowoc.
Manitowoc is an industrial equipment mini-conglomerate. Their main business is construction cranes, from small telescoping cranes to gigantic lattice boom tower cranes. This sector of the business produces over 80% of revenues and earnings, and has been the main driver behind Manitowoc's explosive growth over the past 3 years. The second business is foodservice, specifically "cool side" equipment such as ice makers, walk-in refrigerators, display cases, etc. This has been a distant second in importance, bringing in 11% of sales and earnings. The final business is marine, consisting of ship construction, repair, and maintenance. This smallest segment contributes 8% of revenue and slightly under 5% of profits.
Manitowoc's 5 year performance has been outstanding. Revenues have grown at a compounded 18% per year. Operating earnings [EBIT] have exploded, at a compound 50% growth per year over the last 5. Crane demand has been the main driver due to construction and infrastructure build-out overseas and, surprisingly, in the U.S. as well. Management expects continued demand growth through the end of the decade, and analysts have put a 30% growth rate expectation on the stock. These expectations make the current P/E ratio of 9 somewhat of a mystery. MagicDiligence feels Manitowoc is a very good risk to reward stock. If the company can even deliver 15% earnings growth, there is plenty of room for P/E multiple expansion combined with organic earnings growth. If this situation plays out, MFI investors taking a flyer on Manitowoc could be sitting on some handsome gains in a year, and as such I consider it a very attractive MFI stock for purchase.
Still, Manitowoc does not make the Top Buy cut. There are a few reasons why. First, the company is undertaking a massive acquisition by buying international foodservice equipment supplier Enodis for 2.7 billion. Management believes this is an attractive acquisition for moving their foodservice business into global markets, where they can leverage their experience in expanding the crane business overseas. Enodis also gives Manitowoc a presence in the "hot side" equipment market with devices such as ovens and fryers. While long term this has the potential to be a good business, in the short term it will saddle the company with nearly 3 billion dollars in debt. Since construction is a massively cyclical business, if crane demand unexpectedly starts to crater, this debt could lead to some major financial issues for the company. Also, short term earnings are likely to impacted by costs of integrating a large purchase, which will hold down the share price.
The second reason is related to the mission: finding stocks with considerable moats, or "durable competitive advantages", as Warren Buffett would say. There are no built in moat characteristics in selling construction cranes and foodservice equipment. The only ways to build a moat is through scale and brand reputation, and even then these can be tenuous advantages. On the plus side, Manitowoc is the market leader in cranes, has highly regarded products, and will be one of the largest foodservice companies after the Enodis deal closes.
The third and final reason is that Manitowoc is not exactly a cash fountain. The business of building large equipment is capital intensive and the products are almost always purchased through financing, which lengthens the amount of time it takes the company to collect cash payments. Free cash flow margin is pretty tight, historically in the 3-5% range. Free cash yield, probably the best valuation statistic, sits at a decent but not impressive 5.7%. We're looking for numbers in the 8-9% range and up.
While not good enough to earn a Top Buy rating, Manitowoc is still an attractive Magic Formula stock and offers a potentially high reward to risk profile.
Disclosure: Author owns no position in any stocks discussed in this article.