Manitowoc - Sell-Off Continues As Appeal Remains Limited

Summary

• Manitowoc warns again, forecasting disappointing third quarter sales.
• The warning will take a huge beating on the reported profitability of the business.
• Given the disappointing operating performance and the leveraged position, I remain very cautious.

Manitowoc (NYSE:MTW) saw its shares continuing to fall after it warned again last week about disappointing sales results.

Shares have already lost some 45% from the highs of this summer as investors are very disappointed with recent revenue and earnings trends, combined with the leveraged position of the firm. As a result, I remain very cautious despite the big correction, having real concerns about the current state of affairs, lack of growth and the leveraged position.

Third Quarter Disappointment

Manitowoc pre-released its third quarter results which fell quite a bit short compared to expectations. The company anticipates to report third quarter sales of little less than $1 billion which compares to last year's reported $1.01 billion in sales. Analysts anticipated the company to post sales of roughly $1.02 billion for the quarter.

Earnings before interest expenses, amortization charges, restructuring charges and taxes are seen around $90 million which compares to the $112.4 million reported last year.

Net earnings for the corresponding period last year totaled $53 million, but those earnings will likely suffer largely as a result of the anticipated weakness.

Warning About Demand

The reason for the shortfall in anticipated sales and overall results is the challenged and constrained demand across the globe. Crane revenues were hurt by North American rough-terrain and truck markets as well as Latin America as well. The foodservice segment saw weakness in Russia as well as Asia-Pacific, on top of that.

Consequently, full year crane revenues are now anticipated to fall in the mid-to-high single digits compared to last year. Margins for the unit are seen around 7% on an operating basis.

Foodservice revenues are anticipated to increase by low-to-mid single digits on an annual basis with operating margins seen around 15% for the entire year.

A Quick Look Back At The Second Quarter Results

Back in July, Manitowoc posted second quarter sales of $1.013 billion which represented a 2.3% fall compared to the year before. The guidance for sales of little under a billion implies that sequential sales continue to decline. For your reference, sales totaled $1.015 billion in the third quarter of last year.

Earnings before restructuring costs, interest expense, taxes and amortization charges came in around $105 million in the second quarter. This corresponded with net earnings of little over $46 million that quarter which implies that net earnings cold suffer greatly with earnings before all these items seen around $90 million in the current quarter.

At the end of the quarter, Manitowoc held some $103 million in cash and equivalents while it operates with some $1.82 billion in debt, for a net debt position of about $1.72 billion. At the end of the second quarter, Manitowoc posted trailing EBITDA of nearly $450 million which implies a leverage ratio of 3.8 times net debt. Despite the pressure on earnings, Manitowoc continues to anticipate a reduction in leverage to a 3.5 times ratio by the end of this year. It should be said that previously the company anticipated the leverage ratio to be 3 times.

At $19 per share, with some 135 million shares outstanding, equity in the business is valued around $2.6 billion. This values equity at quite some premium valuation multiples. Based on annual earnings of around $100 million, shares trade around 25 times earnings as EBITDA of $450 million values the company including debt at a nearly 10 time EBTDA multiple.

Solid Topline Growth, But Where Are The Earnings?

Over the past decade Manitowoc has more than doubled its sales which rose from roughly $1.8 billion in 2004 towards levels just below $4 billion on a trailing basis. However recently, year-on-year trends in revenues have been trending down, indicating that the growth might have come to a standstill. This has been offset by some dilution with the outstanding shareholder base increasing by roughly a quarter over this time period.

The company posted solid earnings of roughly $300 million in 2007 from continuing operations. Of course the recession hit, and it has hit Manitowoc rather hard as the company has been reporting losses for the next three years in a row. Over the past two years, Manitowoc has returned to profitability, driven by the economic recovery. It must be said that the company has taken on quite some debt in recent years resulting in a net debt position of little over $1.7 billion currently.

Shareholders have not been so lucky. Shares peaked in the low forties in 2007 to fall more than 90% into the recession in 2009. Ever since shares have traded around the $10 mark, to increase to highs of $33 earlier this year. The fierce sell-off since the highs of this summer has pushed shares back to levels below the $20 mark on the back of Friday's trading action.

Final Thoughts

Clearly the market is disappointed and pressure will built on management following the renewed disappointment, the poor long term value creating track record, with activist investors already having the company in sight. Activist investor Relational Investors has pressured management to spin-off the foodservice business which in its eyes and my eyes as well has little to do with the crane business of the company.

Note that this would mark a big step for the company with sales of the foodservice business and the crane business being roughly equal in terms of sales over the past year, although cranes have been more profitable in recent times. Even after the huge fall in the share price, Manitowoc's valuation is still rather high amidst a quite leveraged balance sheet. Even after the downfall in the share price I cannot really argue that the company has become apparently cheap, or that the current price level represents a great entry point.

As such shares remain depressed as value creation has to come from improved operations, or indeed a spin-off or sale of large portions of its business. Activist investors have been pushing for this value creation which seems very difficult to do on an organic basis. As such an investor relies largely on a positive outcome being driven by an external developments including M&A activity, or management changes. For these reasons I remain on the sidelines at the current time.

Analyst’s Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.