Manitowoc Priced To Sell - Growth Never Came So Cheap!
Posted on: July 30, 2008 - Email Article - Printable Version
Shares of industrial crane powerhouse Manitowoc Co. [MTW: 9.84, 0.00 (0.00%)] have been on a slippery slope ever since rumors of a deal to acquire Enodis surfaced. Following confirmation of the rumors, and an announced deal at $2.4 billion, Manitowoc shares are 47% off of their 52-week high. Despite all this, Manitowoc had been reaffirming guidance throughout the decline… insisting that higher input costs would be offset by surcharges on shipments dated after June 1st. But investors simply never regained confidence in the company.
Manitowoc completely silenced all fears with a record-breaking earnings release on July 28th, 2008. Despite less than stellar showings from industry peers Oshkosh [OSK: 11.33, 0.00 (0.00%)] and Rockwell [ROK: 34.06, 0.00 (0.00%)], Manitowoc managed to blow away consensus estimates of $0.89 with a second quarter showing of $0.99. Earnings were up 37%, lifted by surging oil prices that prompted increased spending on projects requiring Manitowoc cranes. To go along with impressive numbers, MTW raised the midpoint of their full year earnings forecast by $0.10.
Manitowoc is trading at a steep discount to its peers and its historical premium; shares haven’t improved, even after fantastic earnings & reaffirmed strength, and the fears are clearly overdone.
All About Manitowoc & Business Segment Drivers
Manitowoc’s forte is certainly their best-of-breed crane business. Specializing in heavy-lift cranes that are arguably the best in the business, their revenues span across the globe with 45% of sales coming from overseas. MTW has proven resilient to global trends, evolving from a company with 95% of sales concentrated in North America to a global powerhouse with less than 8% crane sales deriving from domestic construction. Just about 45% of their portfolio stems from demand amongst 
utilities, petro-chemical plants, nuclear plants and roads & highways. This portfolio clearly outdoes their main competitor Terex [TEX: 19.18, 0.00 (0.00%)], as long-term demand visibility and best-in-class consumer ratings have shown time and time again that Manitowoc is the premier industrial crane provider.
Aside from the crane business, Manitowoc is largely exposed to the food service industry as one of the world’s most respected brands for beverage dispensers and ice machines. Clearly, MTW is placing a big bet on the sector with the recent planned acquisition of Enodis. While I don’t openly back the move, there are certainly many advantages of the merger. For one, the acquisition will allow them to become a full-service provider of commercial food preparation. In addition, the combined company will be able to more openly pursue global manufacturing and profitable growth opportunities.
The third leg of Manitowoc’s business is in Marine Services. They operate three profitable shipyards and have been actively designing and constructing military and commercial vessels. With a 6.0x multiple in the segment, they have strong bookings and increased efficiency despite a niche focus on the Great Lakes area.
A Mispriced Manitowoc? Enodis Creates A Value Play
It is my view that the news leading up to and immediately following the deal with Enodis has completely traumatized shares of Manitwoc beyond where they should reasonably trade. Because there were essentially two periods of investor fear: 1. rumored acquisition 2. confirmed acquisition, this stock suffered twice for a merge that will actually be yielding synergies by 2009 and be EVA positive by 2011. With this in mind, Enodis enjoyed sales of $1.6 billion for the fiscal year ending Sept. 30th, and all of their products are number one or two in their respective markets.
Knowing that the deal with Enodis will be much more profitable than the drop in share price would suggest, Manitowoc’s crane business alone has been projected to exceed the value of the entire company. Couple this with a powerful backlog of $3.5 billion, about the size of the entire market capitalization of MTW, and you have one undervalued growth play that has been hit in a way that completely over-compensates the acquisition of Enodis. Furthermore, the share price incorrectly links consumer reports of decelerated industrial production with Manitowoc’s ability to grow, a factor that has proven once more to be independent of these issues. Management reaffirmed MTW’s strength on July 28th, and demand has never been stronger.
Valuation
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Historically, Manitowoc has traded at a premium to their peers, and this holds true in today’s market. When you consider the cyclical Crane Cycle, the last time MTW was in a trough in the charts (2003) they traded with an estimated 8.8x EV/EBITDA. At the same point in the cycle today, we are sitting at a dirt-cheap 5.0x 2008 EV/EBITDA.
Manitowoc v. Terex
Manitowoc’s crane business duels primarily with Terex in the niche area. Sure, there are the larger portfolios seen in Deere [DE: 42.89, 0.00 (0.00%)] and Caterpillar [CAT: 46.08, 0.00 (0.00%)], but if we are comparing apple’s to apple’s for a value play, we need to look toward Terex. Though TEX currently carries a P/E ratio lower than Manitowocs at 7.00x, there are fundamental reasons I believe MTW is the better deal.
First of all, Terex cannot match Manitowoc’s triple threat global footprint, brand recognition and CraneCare service. In fact, their Service & Solutions business is the best in class and drives a lot of demand for their cranes. Furthermore, Manitowoc’s heavy-lift crane portfolio is really a hidden gem that outperforms other producer’s attempts. Finally, a big concern that gets unfairly attributed to Manitowoc’s business is the ongoing problems with commercial construction. Terex has a big exposure to this segment with their Aerial Work Platforms unit, while Manitowoc is more concentrated in emerging markets and non-residential construction, both of which are two still-thriving end markets.
Closing Argument
At less than $2/share off a 52-week low, there is absolutely no reason in the world that shares of Manitowoc [MTW: 9.84, 0.00 (0.00%)] should be trading at such a discount to their historical premium. An over-reaction to a deal to acquire Enodis, it would appear that MTW is simply too cheap to pass up. With a better product portfolio and services unit than main competitor Terex, I mark MTW as the best of breed industrial crane producer.
“Manitowoc is a global company and operates a diverse set of businesses. While it’s impossible for any company to be completely immune to recessions and cyclical downturns, the strategic actions that Manitowoc has taken during the past eight years were designed to make us far less vulnerable to the changes occurring in any single geographic area or industry…Our strategies are both sound and proven. More importantly, despite the current state of economic uncertainty, 2008 will be our best year of financial performance in the 106 year history of Manitowoc.” - CEO Glen Tellock
Manitowoc was a typical play on infrastructure and agriculture markets for investors. I am currently overweight both sub-industries, but a lot of investors have fled since a deal with Enodis would dilute their exposure to these markets. While I don’t necessarily disagree, the reaction was harsh and undeserved. Pick shares up while they are still cheap and watch for a 12-month price target of $43/share.
-Jim Regan
Disclaimer: The author currently holds a position in DE as a part of his personal portfolio
The Following Stocks Were Mentioned In This Article: CAT, DE, MTW, OSK, ROK, TEX
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Jim,
While I appreciate your view, shared by many, that the reason for mtw’s decline was the market punishing mtw unfairly for Enodis, let me point out that Terex experienced the same weakness as Manitowoc. I think both stocks suffered as a result of the overall bear market and the fear of a global slowdown; Enodis was just a convenient excuse. If it was just Enodis, wouldn’t tex have held up better over the past two months?
After rereading your article I still believe Manitowoc will be dead money for awhile, due to their debt load and uncertainty regarding global growth. Terex may do the same, but I feel your article didn’t accurately portray the comparisons between the two companies, and missed a couple of key points.
I acknowledge Manitowoc is the king of cranes and a leader in the industry. However, while tex doesn’t stress its after market care business the way mtw does in presentations, Terex has a program in place, and their crane growth has not lagged mtw’s . In fact, Tex sales and earnings in the crane division for the past six months increased more than mtw’s on a percentage basis, so they appear to be doing a better job selling and are far superior in margin growth. Additionally, your article said you felt mtw’ s global exposure was better. In 2007, Tex sales in the US were only 30% versus 57% for Manitowoc. I tried looking for specific emerging market numbers, but neither company provided that information in their annual reports.
I also had problems with the following remark:
” Finally, a big concern that gets unfairly attributed to Manitowoc’s business is the ongoing problems with commercial construction. Terex has a big exposure to this segment with their Aerial Work Platforms unit, while Manitowoc is more concentrated in emerging markets and non-residential construction, both of which are two still-thriving end markets.”
I already mentioned Tex’ larger global exposure, which includes heavy emphasis on the emerging markets. The issue is regarding the remark about commercial construction; you say mtw has been unfairly punished for it, but in the next sentence say mtw is more concentrated in non-residential construction. What is the difference between commercial construction and non-residential construction? Did you mean to write residential construction in the first sentence? Also, you failed to mention the growth of the Terex mining business, which is more than making up for the slowdown in residential construction. Total earnings this past quarter rose by 40% on 25% higher sales, similar to Manitowoc’s performance, yet you implied Terex was suffering by comparison due to their exposure to the residential market.
Manitowoc is a fine company, but after comparisons are made, I believe Terex is the better buy, for three reasons. Terex has a far lower debt load, their mining division is growing very quickly, and most importantly, the company announced a massive increase in their stock buyback two weeks ago. At current prices, assuming about $800 mil is left of their $1.2 bil allocation, the company can buy back approximately 16% of their float. If the global slowdown is larger than anticipated, the share buy back alone should provide relative support.