Manitowoc Foodservice: Worth Waiting For The Restructuring Results

| About: Welbilt, Inc. (WBT)
This article is now exclusive for PRO subscribers.


The spin-off from Manitowoc may be over, but benefits from the restructuring should help the sentiment.

Early results from cost cutting, product realignment and debt restructuring are visible.

Significant room for the stock to catch up to other high-performers in the space, especially Middleby and Standex.

Now that the spin-off is over, Manitowoc Foodservice (MFS) stock may experience the usual pressure associated with a change in investor base and given the macro challenges faced by the broader foodservice equipment industry that includes investor favorite names like Middleby (NASDAQ:MIDD) and Standex International (NYSE:SXI), the company may have a difficult task ahead. But considering the promise offered by the restructuring that is already underway, the name is worth a closer look.

Lately, there have been some ominous signs, be it the weakness seen by industrial bellwether like Honeywell (NYSE:HON), a weak Pound, increasing availability of used equipment, soft economy or increasing competition. Some of these may add to the existing troubles for the space, which is suffering from continued weakness in the QSR (quick service restaurant) sector, as reiterated by the recent National Restaurant Association data. Individually, Manitowoc Foodservice also may have to fight high debt and challenges associated with cost cuts to improve profitability while fighting short-term issues like inventory buildup related to a particular customer.

But with the stock trading near 13-14 times EV/ expected adjusted EBITDA and a significant discount to major peers on a revenue basis, a lot of these issues are well discounted by the markets. In the meantime, the stock has yet to reflect the opportunity that exists if the business is successful in restructuring and delivers a financial performance that is more in line with the peers. The industry dynamics are much better than a typical industrial sector entering into a down cycle. The market is largely fragmented and replacement market demand usually supports the topline growth through the cycle, a growth that may look extremely low at times. As a restructuring play, Manitowoc seems to have enough catalysts to help the stock deliver. Catalysts that can withstand the cyclical pressures like pricing improvements and new products on the topline, manufacturing improvements on the margin front and the debt restructuring on the financial front.

Levers to create value for shareholders

After years being part of a Manitowoc Co. (NYSE:MTW) group structure and all the underinvestment that usually comes along with a structure like that, the business should benefit from the freedom to pursue company-specific strategies and developmental plans, including the "simplification and rightsizing" initiatives that have already been started by management.

Businesses like commercial kitchen equipment that has struggled since 2008, right after the purchase of Enodis, offer room for improvement. Even though ahead of Manitowoc in more ways than one, Middleby offers a proven route for the company, and probably for the stock as well, to follow.

Manitowoc can monetize its leading market share in the profitable cold category and an integrated portfolio of hot and cold category products and supplies while building upon its distribution capabilities in the commercial and institutional foodservice operators and leading market share in more than a dozen brands. This is a strategy that is not that different from what Middleby has successfully done in the cooking and warming equipment space.

Some early signs are encouraging

Over the coming quarters there should be a meaningful improvement on most metrics that can offer insight in the progress underway, be it the new launches meeting market expectations, competitive positioning, margin improvement, product rationalization efforts or debt repayments. The progress offers ample confidence that the direction is right.

There is a decent enough effort on the new product development front given the introduction of more than 20 new products for this year, many of which are expected to generate sales by the end of this year, including the nitro infused coffee beverage system for a major coffee chain. The company has reduced discounts and introduced price increases for second tier customers and second tier products respectively. Adjusted operating EBITDA margins are expected to reach 16-17%, with both Americas and EMEA showing progress. There has been an almost 8% reduction in equipment SKUs and capacity is set to decrease by almost 20%. Debt, still large, is expected to decline by almost $120-140 million for the year, which combined with weak market conditions may finally allow investors to at least entertain the possibility of inorganic growth opportunities.

Disclosure: I/we 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.