Manitowoc Has More Room To Grow

By Stephen D. Simpson, CFA | October 31, 2011 AAA

Manitowoc (NYSE:MTW) competes in just two broadly-defined markets, construction cranes and foodservice equipment. Unfortunately, these are not especially strong times for either market. Although Manitowoc was not bubbling over with optimism in its latest quarterly report, the Street was nevertheless very encouraged by what it heard. Even though this stock jumped more than 20% in the wake of its third quarter report, investors can still expect more to come from this small industrial stock.

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Signs of Progress in Q3
Overall revenue rose 16% this quarter, with growth in the crane segment leading the way at 21%. Although slower, foodservice revenue growth of 10% was hardly terrible. Manitowoc management doesn't go as far into specifics as investors might like, but they did say that crane demand in the Americas was strong; not much of a surprise, really, considering the growth in markets like Brazil.

Manitowoc did manage to deliver stronger profits, as well. Gross margin fell about a point from last year, but did improve slightly on a sequential basis. Operating income jumped 27% from last year and showed a slight sequential improvement. Operating income growth was led by the cranes business, where segment profits jumped 58%. Even with that improvement, profitability in cranes is still far below the level of foodservice.

Getting into Growth Markets and Waiting for Growth to Come
One of the challenges for Manitowoc is that the company needs to get stronger in the markets showing the most construction and infrastructure growth. More than a third of the company's crane revenue comes from the Americas, but Asia-Pacific is less than 20% of sales. What's more, Europe is still a big chunk of the sales base and that's certainly not as attractive of a market, today, as Brazil, India, Indonesia and so forth.

Another challenge, though, is whether Manitowoc really has the scale to effectively penetrate these new markets. Caterpillar (NYSE:CAT) and Deere (NYSE:DE) can go anywhere and suppliers like Eaton (NYSE:ETN) and Dover (NYSE:DOV) are there, as well. Smaller companies, like Manitowoc and Terex (NYSE:TEX), have a little more difficulty, though, and encounter more issues of scale and operating leverage. In addition, larger rivals, like Sany, Liebherr and Kobelco, as well as regional contenders, can be more troublesome.

Above and beyond those expansion questions, Manitowoc also has to wait for a full-fledged recovery in North America. A fair percentage of Manitowoc cranes serve industrial or petrochemical markets, but road construction, power plants and commercial construction are all major markets that are not so strong today.

Foodservice - Not Bad or Ugly, but Not Really Good
Manitowoc's foodservice operations are relatively profitable, but the overall industry is still in tough shape. Successful chains like McDonalds (NYSE:MCD), Starbucks (Nasdaq:SBUX) and Panera (Nasdaq:PNRA) continue to expand and buy new equipment, but many chains have declared bankruptcy in the last 24 months and the family-owned restaurant space is still under a lot of pressure. Manitowoc generally holds its own against Dover, Illinois Tool Works (NYSE:ITW) and Middleby (Nasdaq:MIDD), but this market is likely a few years away from a real recovery.

The Bottom Line
I would not be shocked to see a company like Deere, Caterpillar, or Komatsu (Nasdaq:KMTUY.PK) acquire Manitowoc to fill out its range of construction equipment. Disposing of the foodservice business would be a bit of a hitch, but it should not be an insurmountable hassle to find a legitimate buyer for the business.

In the meantime, this an interesting industrial recovery play. The company's high debt load is worrisome, but Manitowoc has a long history of consistent positive free cash flow and the more stable foodservice business, offsets the boom/bust construction business. Even with the 20% post-earnings jump, this is a stock where aggressive investors may yet have reason to expect pretty significant capital appreciation, in the years to come. (For additonal reading, see The P/E Ratio: A Good Market-Timing Indicator.)

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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

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