Manitex Waiting For The Tide To Change

| About: Manitex International, (MNTX)
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Summary

Manitex continues to sell off non-core business segments, as it looks to enhance liquidity while its core markets are still in tough shape.

Order trends have significantly improved in the fourth quarter, but Manitex's shift toward construction could still take some time to play out and a full recovery in energy seems ambitious.

Manitex seems more balanced on a risk/reward basis, but highly leveraged companies can outperform in sector recoveries.

Credit where due, Manitex (NASDAQ:MNTX) management is doing what it can to shore up the business during a tough cyclical downturn in its core businesses. In addition to cutting costs, management has been selling non-core businesses in an attempt to reduce the company's leverage and give it a little more breathing room while awaiting a turnaround in its key energy market and the benefit of efforts to grow the ASV and PM businesses.

Unlike so many other industrial names, Manitex didn't really see a post-election bounce (the bounce Manitex saw last week was due to more encouraging guidance for its crane business). Manitex isn't as leveraged to potential infrastructure spending increases as Terex (NYSE:TEX) or Manitowoc (NYSE:MTW), but it can still be argued that the shares don't reflect the possibility of a turnaround here.

Shrinking To Make It Through

With the evaporation of orders from the energy sector for the company's cranes, Manitex has found itself in difficult straits. GAAP operating income isn't covering the company's interest expense, and adjusted EBITDA for the third quarter was only just above the company's quarterly interest expense (the spread was more comfortable for the nine-month period).

In an effort to improve margins and reduce debt, Manitex is selling off non-core businesses. Load King was sold a while back, and management announced the sale of the Liftking rough terrain forklift business in October for net proceeds of over $13 million (for a business with about $2 million in trailing EBITDA).

And just yesterday, Manitex announced another deal - selling its CVS Ferrari container handling business for $5 million in cash and the assumption of $14 million in debt. While Manitex sold this business at a relatively low multiple on revenue (less than 0.4x), the EBITDA multiple was over 9x, as this business has continued to struggle with margins.

Manitex bought this business out of bankruptcy back in 2011 and while the turnaround potential for the business made it a worthwhile effort, supporting a business that is still well behind the likes of Terex, Konecranes, and Cargotec is a luxury management really can't afford anymore, particularly as the business required a meaningful amount of working capital to support.

All told, subtracting Liftking and CVS means subtracting close to $70 million of revenue, but only about $4 million in EBITDA. While I think you could argue that the Liftking business was more core to Manitex's ongoing operations, it was also a marketable asset that brought in some much-needed liquidity at a time when structural operating cash flow generation capability is pretty limited. It's unfortunate to "lose" a business with double-digit EBITDA margins (Liftking) and another with meaningful potential to do better (CVS), but those are the hard decisions that have to be made when a company overstretches its balance sheet in the good times and sees its core market(s) fall apart in a short span of time.

Is The Core Heading Toward A Turnaround?

Manitex's core operations are still under real stress. Demand for new cranes in the energy business has been minimal, with used cranes pressuring demand and pricing. Lifting equipment sales were down 13% in the third quarter (reported in early November), as that weak energy sector demand combined with lackluster demand in the construction market to depress the business further.

The overall book to bill was below 1.0 (0.89), and the lifting business slid into an operating loss due to the lower sales base and a poorer mix of lower-margin boom truck cranes. Knuckle cranes did better, but aren't a big enough part of the business yet to really be a swing factor.

The ASV business was more mixed. Sales were down 14% on weak construction demand, but management's efforts to improve distribution and operating performance are bearing fruit. Despite the sales contraction, operating profit improved 24% at the segment level, with a margin solidly in the "mid-high" single digits.

Importantly, management noted improving quotation activity at the time of its third quarter call, and that trend has continued. Management issued a press release on December 21 noting that the backlog for straight mast cranes had doubled in the fourth quarter from the third quarter and that they expected to end the quarter with a book-to-bill above 1.0 as dealers are starting to replenish inventory levels.

I'm still fairly cautious at this point. While the energy sector seems to be bottoming, it's going to take a meaningful increase in drilling activity to reignite demand (cranes like those Manitex are frequently used at drilling locations) and mop up the overhang of underutilized and used equipment.

The construction market is a tougher one to gauge. Manitex has definitely been targeting this market, with new cranes launched in the last few months, the potential for PM's knuckle cranes, and the improvements in the ASV business. While the construction market was historically a smaller one for Manitex, it represents about 30% of the overall market opportunity and Manitex now has a pretty diverse set of products that can addressed this end-market.

Gauging demand has been tricky, though, as building activity indices and equipment company reports have diverged plenty of times over the last year or so. On a more positive note, if the new administration is serious about spending on infrastructure projects, that should create a more favorable demand environment for Manitex.

The Opportunity

I do believe that Manitex can grow on an organic basis in 2017, but I think margins will still be pressured and the company's debt/liquidity will still be a talking point for a while longer. Management has made good progress on its cost-cutting initiatives, but absent a surprisingly strong recovery in energy, I think the transition towards greater contributions from construction will take some more time to play out.

Longer term, I think Manitex can get its gross margins back into the 20%s with high single-digit operating margins and mid single-digit free cash flow margins. If these divestitures and restructurings go better than I currently expect, there could be some upside to margins and working capital efficiency that could push free cash flow generation even higher.

Insofar as revenue goes, I think 2017 will be better, but I think the real recovery will show up in 2018 and 2019. Longer term, the revenue growth potential will likely be in the "low-mid" to mid-single digits on an annualized basis. Discounted back, and factoring in the CVS transaction, I come up with a fair value similar to my last update (around $7.50).

The Bottom Line

As a heavily leveraged company exposed to relatively narrow market segments (heavy boom truck cranes, knuckle cranes, pick-and-carry cranes, loaders, and skid steers), Manitex could see a quick turnaround if market demand comes back strongly - whether from a "normal" cyclical recovery or stimulus from the new administration. On the other hand, there is a considerable amount of debt here (though a meaningful amount is non-recourse to Manitex) and not a lot of breathing room; management has very little room for mistakes.

While Manitex's operating and financial leverage could drive more margin improvement than I currently model (and/or faster improvement), I think the risk/reward opportunity is relatively balanced. I think Manitex can generate a double-digit return from here, but then for the risks involved, I think investors should expect as much.

Disclosure: I am/we are long MNTX.

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.