Manitex: Are These The Early Days Of An Exciting Industrial Equipment Story?

| About: Manitex International, (MNTX)
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Investors are usually wise to be cautious about buying into growth stories predicated on mergers and acquisitions, but Manitex (NASDAQ:MNTX) looks like a different sort of story, and one that may end well for patient investors. Eschewing more commoditized areas of the material handling market, Manitex has built a name for itself in heavy lift boom trucks, rough terrain cranes, and rough terrain forklifts, and is now looking to the fast-growing intermodal market as another potential avenue for growth.

While the company has plenty yet to prove with respect to margins and return on capital, the risk-reward balance here seems intriguing for more aggressive investors. I believe Manitex can not only drive improved operating margins from greater fixed asset turnover and utilization, but also continue to execute selective one-off deals in attractive markets while continuing to develop products tailored for markets with specialized needs. In short, I see this as both a revenue growth and margin improvement that the market presently undervalues (or may not even be aware of).

Boom Times

For all intents and purposes, Manitex is business that has been cobbled together from others' bits and pieces. The company effectively started with the divestiture of the boom truck and sign crane business of Manitowoc (NYSE:MTW) back in 2003, and then added Noble rough terrain forklifts in 2007, Schaeff lift trucks in 2008, Badger rough terrain cranes in 2009, and Load King trailers from Terex (NYSE:TEX) in 2010. Along the way, the company also jettisoned a test and assembly business that was part of a predecessor company.

What's notable to me is that Manitex rarely pays top dollar for these deals. Manitex paid about $3 million for Badger (less than one-third of its revenue), and likewise paid Terex just $3 million for Load King, even though the company was annualizing revenue at a $23 million rate. Most recently, Manitex expanded into the cargo/container-handling business with the acquisition of CVS Ferrari out of bankruptcy - a business that had about $25 million in revenue for 2011, but will cost Manitex only $5 million over three years (with the bankruptcy court essentially financing the deal).

These aren't useless or worthless businesses, either. Manitex is now the market leader in heavy lift boom truckers (over 30 tons), with about 30% share. The company is likewise building solid share in certain segments of the market rough terrain cranes, rough terrain forklifts, and custom heavy-duty trailers, in part through focused attention to customer needs. In the Badger business, for instance, Manitex is the only company to integrate rail gear into its production process, so customers like Union Pacific (NYSE:UNP) can basically use them off the shelf (whereas rivals like Terex and Broderson have to send them out to the third-party fitters).

It's quite difficult to find accurate numbers for the market size of products like rough terrain cranes and rough terrain forklifts, in part because different analysts/surveyors include or exclude different products. Suffice it to say, Manitex is tiny relative to rivals like Linamar, Harlo, Master Craft and Manitou, but the company is much more focused on niches like utilities, military, and railroads and doesn't really compete in areas like agriculture. Consequently, I believe the company's share is tiny by a broad definition of the market, but more significant within the particular markets it serves (like energy).

Manitex isn't just standing pat with its acquired businesses, either. The company has been actively launching products for the energy and chemicals sector, with a new 50-ton rubber-tracked crane targeted for oil sands operators and a new 15-ton pick-and-carry crane targeted for the petrochemical and refinery market.

Will The Energy Boom Keep Booming?

Whether investors look at companies committed to the material handling space like Terex or Manitowoc, or broader equipment manufactures like Caterpillar (NYSE:CAT), it's pretty clear that the North American construction industry has yet to come back from the recession of five years ago. While construction is generally a big end market for material handling companies, Manitex has positioned itself a little differently.

Nearly a third of the company's revenue comes from the energy industry, including producers, refiners, and chemical companies. That makes the ongoing health of the North American energy boom no trivial matter for the company; fortunately, while low prices have shifted resources from gas toward oil, overall development activity remains strong.

Manitex can't live on the tailwinds of the energy sector indefinitely, though, and investors should note the company's efforts to bulk up in other addressable markets. As mentioned before, the company is committed enough to the railroad equipment market to incorporate rail gear into its own production process.

The company also has a potentially sizable opportunity in cargo/container handling with its acquisition of CVS Ferrari. This was a $25 million revenue business at the time of the deal, and I believe it has since grown to about $30 million - making it roughly 15% of Manitex's business. While Cargotec, Konecranes and Terex are all better-established here, the addressable market continues to grow. Billions of dollars have been committed to port expansion projects in Asia, the Mideast, and North America, and major rail operators like Union Pacific and CSX continue to invest in additional intermodal facility capacity.

CVS was a nearly $100 million business before the global recession, but even that pales compared with Terex's nearly $500 million/quarter material handling and port business or the $700 million-plus in quarterly revenue at Konecranes. Suffice it to say, I believe there's growth potential here - both from product reintroductions (CVS discontinued products as it went toward bankruptcy), new product development, and the simple "blocking and tackling" of winning over customers with its price/performance advantages.

Challenges Still Remain

While Manitex has made some shrewd acquisitions and wisely stayed clear of markets like regular-duty light and medium-lift boom cranes and small forklifts, that hasn't fully translated into great financial numbers.

Manitex's revenue has soared up from its trough in 2009, but the company's annual operating margins have actually worsened over the same period (though 2012 is on track to be a much better year). Although margins at Manitex have been better than those at Terex, and the company's returns on capital have likewise held up well compared with Terex or Manitowoc, these numbers need to improve for the stock to hold real lasting appeal.

YTD 2012 20.3 7.5 6.6
2011 20.6 4.6 3.3
2010 24.3 5.8 2.8
2009 20.0 6.0 5.3
YTD 2012 24.6 7.4 3.2
2011 22.9 6.1 -0.4
2010 24.4 6.6 -2.8
2009 21.8 -13.5 -20.9
YTD 2012 20.1 6.6 3.2
2011 14.8 1.2 1.1
2010 13.6 -1.7 9.7
2009 6.8 -11.4 -11.8

More to the point, if solid share in many of its addressed markets is to mean anything, it has to translate into better margins. I believe the company could improve its results simply by better digesting its deals and generating better operating leverage and asset turnover. To wit, the company's operating margin year-to-date in 2012 is 150 basis points higher than in 2009, even though the gross margins are similar.

It's also worth noting that Manitex's operating cash flow picture isn't perfect. Sizable increases in inventory and accounts receivable, both of which have risen with the company's substantial revenue growth, are excusable as a cost of growth, but the company does need to be a little cautious of the cash crunch that comes when accounting profits rapidly outstrip the company's internal cash conversion cycle. While Manitowoc and Terex are admittedly not perfect comparables, I believe the following table does help illustrate the room for improvement at Manitex with respect to working capital management.

Inv. Conv. A/R Conv A/P Conv. Total
YTD 2012 119.5 52.5 44.2 127.8
2011 117.9 55.8 42.2 131.5
2010 145.0 58.9 45.6 158.3
2009 198.7 91.3 68.4 221.6
Inv. Conv. A/R Conv A/P Conv. Total
YTD 2012 98.7 30.9 85.4 44.2
2011 79.5 27.6 43.8 63.3
2010 88.6 33.6 43.6 78.6
2009 93.8 44.9 48.5 90.2
Inv. Conv. A/R Conv A/P Conv. Total
YTD 2012 106.8 57.0 36.4 127.4
2011 76.6 55.0 37.5 94.1
2010 137.2 57.5 45.9 148.8
2009 177.0 71.2 68.8 179.4

Of course, it's not as though Manitex's rivals will lie down for the company. Terex, Manitowoc, Linamar, Manitou, Aspen, Cargotec and Konecranes are targeting many of the same markets. While Manitex has generally tried to use its customer knowledge to design better products and stay away from competing on price, who's to say that a rival wouldn't look to gain share with price.

A few other technical matters are worthy of note as well. Manitex has only minimal analyst coverage and relatively light institutional ownership today - a good sign for investors who like to get in early on a story, but a risk factor to others who like more established stories. Likewise, the company's float is pretty small (about 10 million shares).

The Bottom Line

I wouldn't be a bit surprised if Manitex ultimately finds itself the target of an acquisition. Even as the company was assembled, in part, from divested parts of Manitowoc and Terex, either could turn around and acquire the company (and the company does distribute some products for Terex). Likewise, Manitou, a growing French small-cap company that is worth a look in its own right, or private equity owners could be interested in this fast-growing company.

Assuming the company stays independent, I'm comfortable with a long-term revenue growth estimate of around 10%-11%. That's high for an economically-sensitive industrial company, but I have a lot of confidence in the company's prospects for organic growth in energy-related equipment and the improvement/expansion of the CVS Ferrari business (the cargo/container operations).

The CVS business is so small today that it's virtually a rounding error compared with the industry leaders, and I believe this multibillion dollar industry can support years of organic growth for Manitex with even modest share penetration. With the other business, long-term energy equipment demand forecasts consistently run in the high single-digits, and that's not to mention the company's prospects for gaining share in markets like utilities and expanding into other industrial end-markets within the multibillion dollar crane and forklift market.

I do believe that the company will also improve its margins as it goes along. That it will take time to show in the free cash flow, as I see the company's working capital and capex needs keeping a damper on free cash flow conversion for the next three or four years. Longer term, though, I believe the company will produce free cash flow at a rate commensurate with most quality industrials (in the mid-to-high single digits).

Since Manitex currently has negative free cash flow, a long-term growth rate is not exactly appropriate here, but I do believe the company can grow to be a $400 million revenue business around 2020, with upwards of $30 million in free cash flow.

In today's terms, that forecast works out to a fair value of nearly $10, and a meaningfully undervalued stock. Investors would be right to be wary about the prospects for slower economic growth to crimp energy, construction and cargo demand in the short term (and roughly 80% of current growth is tied to energy-market demand), but Manitex looks to me today like a very interesting emerging industrial company.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.