With the economic revival across the globe, almost every industry is recovering and offering attractive growth prospects to its players. Since the manufacturing industry is cyclical and strongly correlated to the health of the general economy, it seems to be taking full advantage of the recovering economic conditions. One company that has best utilized the available market opportunities is Columbus McKinnon Corporation (NASDAQ:CMCO). Based in Amherst, New York in the United States of America, Columbus McKinnon is a leading manufacturer and marketer of hoists, rigging tools, cranes, actuators, and other material-handling products. Although presently, the stock is not reflecting the improving market conditions, Columbus McKinnon definitely has a promising future outlook and is an attractive investment in the long term.
In this report I will shed light on the attractive industry prospects that support my opinion on the stock. I will also be discussing the company's solid liquidity position that makes it well positioned to fully deliver on its growth projections.
Reviving Industry is driving the Future Growth
The company serves both the U.S. and European markets by distributing a broad range of material-handling products for various applications. The end-users of its products mainly include manufacturing, power generation, commercial construction, oil and gas exploration, refining, mining, agriculture and many other commercial and industrial consumers. In 2014, the company generated nearly 57% of sales from the U.S. and about 43% from outside of the U.S. Since the company mainly operates in the United States I will focus on the U.S. market for this analysis.
The U.S. economy is rapidly expanding and its GDP growth rate has reached nearly 4.2% in the second quarter of 2014 compared to the economists' estimates of 3.9%. This was the fastest growth rate witnessed by the country in the past 8 years. Since the U.S. economy is making its way out of the recession, the industrial activity has also started to pick up. The rising industrial activity continues to boost the demand for several construction and material-handling tools and machinery in the country. Let us analyze how the reviving industrial conditions will help Columbus McKinnon to increase both its top and bottom lines in the future.
Rising Manufacturing and Construction Activity - With the improving economic conditions, the U.S. manufacturing industry is also flourishing. The manufacturing activity hit a 3.5 year high in August 2014. According to the Institute for Supply Management (ISM), the index of national factory activity rose from 57.1 in July to 59.0 in August. This was the highest reading since March 2011. The U.S. manufacturing Purchasing Managers Index reached 57.9 compared to 55.8 in July, the highest level since April 2010. The manufacturing production is forecasted to increase by nearly 4.0% in 2015 and 3.6% in 2016.
Source: Market Watch
The manufacturing production of the United States grew by 3.4% in October 2014 compared to the corresponding period last year. The United States' total industrial production increased by 4% in October 2014 compared to the figure reported in the same period last year. The manufacturing production is expected to increase by nearly 4.0% in 2015 and 3.6% in 2016.
Moreover, the construction industry is also rebounding and creating a huge demand for material-handling tools and machinery. According to the US Department of Commerce, the total U.S. construction spending has reached $981 billion in July 2014 reflecting a rise of nearly 1.8% compared to June 2014 and an increase of about 8.2% compared to July 2013.
Source: Henry Fund
According to some estimates, the U.S. government's spending on the highways and streets will grow by approximately 5% by the end of 2015. Furthermore, the residential and non-residential construction activity is on the rise too. The U.S. Census Bureau reports that residential building permits have reached an annual rate of 1,018,000 in September 2014 compared to 993,000 in September in 2013. The total number of housing starts in September 2014 has reached an annual rate 1,017,000. This reflects an increase of nearly 17.8% compared to September 2013's rate of 863,000. Moreover, the U.S. commercial construction activity has also increased by 5.8% this year. This includes the office construction activity which rose 3.1% in April 2014 reflecting an increase of approximately 26% since April 2013. The commercial activity in Atlanta, Chicago, Las Vegas and many other cities of the U.S. is also expected to increase. According to the American Institute of Architects (AIA), the total commercial construction activity in the U.S. is expected to increase by nearly 4.9% by the end of 2015.
The soaring U.S. manufacturing and construction activity will boost the demand for hoist trolleys, winches, industrial crane systems and other material-handling products in the coming years. Since Columbus McKinnon is a market leader, it is well positioned to raise its profit margins by capitalizing on the tremendous market opportunities.
Rising Exploration and Refinery Activity - The United States is the largest producer of crude oil and its production is growing with every passing year. According to the Energy Information Administration (NYSEMKT:EIA), the United States has produced about 8.5 million barrels per day in July 2014 which is the highest monthly level of production since April 1987. The production reached 8.5 million bbl/d in 2014 and now the United States is expected to increase its oil production to approximately 9.3 million bbl/d in 2015. Though the increased domestic production is putting downward pressure on oil prices, analysts still expect an increase in oil exploration activity. The oil drilling and gas extraction industry is anticipated to grow at a CAGR of 6.8% until 2019. This will again boost the demand for the company's products in the near future.
Source: Henry Fund
The Company's over reliance on Suppliers may impair its Future Growth
The soaring U.S. industrial activity is expected to help Columbus McKinnon in prospering in the near future. However, the company's over dependence on some parties can reasonably impair its future growth. Columbus McKinnon heavily relies upon a few subcontractors and suppliers to render a portion of its services to its customers. Failure by these parties to satisfactorily deliver the required raw material or perform services in a timely manner can substantially weaken the company's ability to serve its customers as a prime contractor. This can adversely affect CMCO's future profitability. As the management said, "A delay in our ability to obtain components and equipment parts from our suppliers may affect our ability to meet our customers' needs and may have an adverse effect upon our profitability."
Moreover, the company's future profit also depends on the level of bargaining power it has over its suppliers. Since Columbus McKinnon purchases most of its raw materials and components from limited number of preferred suppliers under pre-negotiated long-term contracts, the suppliers seem to be in a strong bargaining position and can charge higher prices for their products in the future. The company's inability to pass on higher prices to its customers can reasonably affect its future bottom line. The management has clearly stated, "In the future, to the extent we are unable to pass on any steel price increases to our customers, our profitability could be adversely affected."
Highly Competitive Industry can limit the Company's Future Progression
The United States is the world's third largest steel industry in terms of production. It is also one of the largest consumers of steel across the globe. The principal raw material used by Columbus McKinnon in the manufacturing of chain, forging and crane building operations is steel. The rising industrialization in the United States is continuously boosting the demand for steel over the past few years. The demand for US steel has increased from 110 million metric tons in 2008 to nearly 131 million metric tons in 2014, reflecting compounded annual growth of about 3%. The demand is further expected to grow and reach 133 million metric tons by the end of 2015. Rising demand for steel will put an upward pressure on its prices in the future thus boosting the raw material costs for manufacturing companies.
The markets that Columbus McKinnon serves within the material handling industry are highly fragmented and competitive. Highly competitive environment can limit Columbus McKinnon's ability to pass on high steel prices to its customers thus adversely affecting its future profits. Moreover, in order to remain competitive the company has to remain innovative and financially sound. The company's enhanced ability to commit larger capital in response to changing market conditions can give it an edge over its competitors.
The Company's Sound Financial Position gives it a Competitive Edge
The company had cash and cash equivalents of nearly $114 million at the end of the recent quarter compared to $112 million in the corresponding period last year reflecting an increase of about 1.8%. The cash flow from operations (NASDAQ:CFO) registered an attractive growth rate in the past few years. The total CFO has increased from $24 million in 2012 to about $30 million in 2014 registering an annual growth rate of nearly 8%. Moreover, the company generated CFO of nearly $17 million in the first 6 months of fiscal year 2014 compared to $2 million in the same period last year.
Furthermore, the company has significantly improved its debt position in the past few years. Although the total long-term debt has increased, the debt-to-equity ratio (D/E) has decreased from 0.71 in 2010 to 0.52 in 2014. The total assets grew at a higher rate of 4.5% compared to debt obligations that grew by 2.7% over the past five years. This has resulted in the debt-to-asset ratio (D/A) falling from 0.28 to 0.25 during the period under discussion. The company also has an attractive liquidity position compared to those in its peer group. It has a decent current ratio of 4.46 compared to the industry's ratio of 1.83. Columbus McKinnon's quick ratio is 3.05 compared to the industry's ratio of 1.42. The company's strong financial position gives it a competitive edge and will help it to capitalize on the attractive market opportunities.
The rising industrial activity is creating attractive growth opportunities for Columbus McKinnon. Since Columbus McKinnon is a market leader, it is well positioned to capitalize on the available market opportunities. The company's solid liquidity position also supports its future growth. Moreover, a majority of the analysts hold a buy rating on the stock which suggests they are also optimistic about its future. Based on my analysis, I give the stock a buy recommendation.
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.