CMCO - Columbus McKinnon Stock: Looking Attractive

2023-05-04 19:01:11 ET

Summary

• Shares of Columbus McKinnon Corporation have been lagging in 2023, amidst exposure to the e-commerce sector and a general setback in markets.
• I like the continued transformation of the business, even as the market is not willing to value this transition right now.
• The long-term appeal is rapidly improving here, although a bit more discipline with regard to leverage would be welcomed.

In spring of 2021, I concluded that Columbus McKinnon Corporation ( CMCO ) was making progress in its business transformation, showing some real (margin) progress. After Columbus McKinnon Corporation had made it well throughout the pandemic, it used this position of improved relative strength to announce a big deal, prompting me to take on coverage at the time.

On Columbus McKinnon

Columbus McKinnon Corporation describes its own business as a professional-grade solutions company, looking to solve critical problems for customers with regard to safety and productivity matters.

The company has been moving from a late-stage cyclical industrial player towards a growth name, which has focused more and more on industrial technology. This was done by engaging in some divestment of non-core assets in order to bolster the growth and margin profile of the business.

Pre-pandemic, in the year 2019, the company generated $876 million in sales. These revenues were largely generated from two large divisions, which each were responsible for nearly half of the sales.

One unit is the crane solutions business which includes industrial cranes, hoists, controls, components, and work stations. The other large unit is the industrial products business, which includes winches, clamps, as the company has a smaller third segment which is called engineered products.

The company operates in end markets like alternative energy, wastewater treatment plants, aerospace & defense, oil & gas, and automation, among others. With the company sharpening its focus, it was cutting the number of SKUs and suppliers, focusing more on higher value-added activities and R&D investments.

Some Background

When I looked at the shares in 2021, I concluded that the company has seen a reasonable performance in the decade leading up to that point. This includes 50% revenue growth in the 10-year period before as operating margins roughly doubled to 10%, in part offset by 20% share dilution over this period of time.

The $15 CMCO stock post the 2009 crisis rose to $30 in 2015, fell back to $15 in 2016 as shares were up to $40 pre-Covid-19. The company posted fiscal 2020 results in May that year, with the pandemic hurting the results late in the year. An 8% fall in full year sales looked a bit soft, yet operating margins rose more than 3 points to 11% of sales as earnings per share came in around $2.50 per share, while operating with a leverage ratio around 1 time.

The company was hit hard during its fiscal year 2021, but as there were signs of stabilization, the company announced a substantial deal. After all, the company paid $485 million to acquire Dorner Manufacturing. This designer and manufacturer of precision conveying system generated just $125 million in sales and $31 million in EBITDA, among others, counting Amazon.com as its client.

With Columbus valued at a $1.25 billion valuation at $40, the deal was substantial, equal to 40% of the own enterprise valuation. Net debt would increase quite a bit, as the company raised $150 million in equity to offset the increase in leverage ratios, with no major impact seen on the $2.50 per share earnings run rate.

Being upbeat on the improved performance and strategic route of the business in 2021, I believed that quite some good news was priced in already as well, which made me a bit cautious. For those reasons, I decided to place Columbus McKinnon Corporation shares on my watch list, yet I failed to have a conviction to get involved at $40.

And Now?

As it turned out, shares of Columbus McKinnon Corporation rose to the $50 mark in spring of 2021, but ever since have sold off quite a bit to a low of $25 per share by the fall of last year, now having rebounded to $35 per share.

After a tough year 2021, in which sales fell to $650 million, Columbus McKinnon Corporation saw a big recovery in 2022 sales to $907 million, with revenues surpassing the previous 2019 topline results. Operating margins rose 160 basis points to 8.1%, as GAAP margin improvements were held back by amortization charges doubling to $25 million.

Besides this amortization charge, Columbus McKinnon Corporation incurred a lot of other transaction expenses related to debt refinancing, acquisition costs, among others, with adjusted earnings otherwise coming in at $2.83 per share, equal to $80 million in dollar terms. Net debt was posted around $400 million as leverage was in check with EBITDA reported at $140 million, for a 2.9 times leverage ratio.

By February of this year, the company posted third-quarter results, with revenues up just over 4% in the first three quarters of the year. GAAP operating margins rose 270 basis points to 10.3% of sales as deal-related costs ebbed away, while amortization charges were flattish.

Adjusted earnings so far this year came in ten cents ahead of last year at $2.14 per share, with earnings coming in near $3 per share this year. Net debt is stable at $400 million as EBITDA has improved to a near $150 million run rate. The roughly 29 million shares now grant Columbus McKinnon Corporation an equity valuation of a billion at $35 per share, for a $1.4 billion enterprise valuation.

While earnings have improved a bit since 2021, Columbus McKinnon Corporation shares have seen meaningful valuation multiple compression, trading down from $40 to $35 over a two-year time period.

Another Deal

In April, Columbus announced its next deal, this time a bit smaller. The company has reached a $110 million deal to acquire Montratec Gmbh, expanding its precision conveyance platform. This deal does not come cheap either, with the company generating $29 million in sales and about $7 million in EBITDA. On the positive side, this is a highly strategic deal, and moreover, sales of the business are seen up 30% in 2023.

If Columbus McKinnon Corporation delivers on this growth and EBITDA metrics, earn-outs have the potential to boost the purchase price by some $14 million. All this looks pretty reasonable to me as pro forma leverage will increase to $500 million, with the company believing that leverage comes in at 2.7 times post the deal.

Columbus McKinnon Corporation furthermore confirmed preliminary fourth-quarter sales at $253 million, some eight million ahead of the midpoint of the preliminary guidance, as the combination of both news events send shares slightly higher, but nothing too meaningful.

And Now?

The truth is that shares of Columbus McKinnon Corporation have been lagging for quite a while now, and that adjusted earnings power has improved meaningfully, although that some charges are still evident in the GAAP results. The latest deal makes sense, as leverage remains above-average, yet valuations look quite non-demanding at 12 times adjusted earnings.

Given this, I am largely turning upbeat as Columbus McKinnon Corporation is increasing exposure to e-commerce. While this client base sees a current dip, its long-term growth profile is still good.

Given this background, I am actually turning quite upbeat on Columbus McKinnon Corporation shares here, recognizing the continued transformation of the business. However, I would like to see a bit more Columbus McKinnon Corporation discipline with regard to the use of debt.

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