HY - Hyster-Yale Remains A Buy Despite Soaring 55% Over The Last 2 Months

2024-01-04 10:54:35 ET

Summary

• Hyster-Yale Materials Handling's stock price has increased by 55% in the past two months partially because of strong 3Q results.
• The company has mostly resolved supply chain issues, which hurt them over the last three years.
• Robotic/automated lifts could have a significant impact on future long-term results.
• While their balance sheet has improved this year, the company is still highly leveraged.

The stock price of Hyster-Yale Materials Handling ( HY ) has soared almost 55% over the last two months because of a combination of factors, especially very strong 3Q results. It seems that the forklift manufacturer has finally resolved most of their three years of supply chain issues and high inflation by reporting 3Q EPS of $2.06 compared to a loss per share of $(2.20) in 3Q 2022. Their balance sheet has also improved significantly this year. This is an update to my October 2021 buy recommendation article .

I use Caterpillar ( CAT ) stock as the "standard" for the industry that HY competes in, even if they do not manufacture the exact type of products, to see if HY stock rise was just a broad capital-intensive industry development. While CAT's stock price and the Russell 2000 ETF ( IWM ) did rise during the last two months, HY rose significantly more, indicating that part of the rise was specific to HY. 3Q results announced October 31 were impressive, plus two analysts (analysts at Roth MKM and Northland Capital Markets) issued buy recommendations for HY during the last two months.

Greatly Improved Recent Results

Because I am very sensitive to potential bankruptcy issues for companies with "B-" S&P debt ratings, I often look at changes in net debt and changes in total stockholder equity over a period of time. Hester-Yale's net debt has greatly improved during the first nine months of 2023. It dropped to $432.4 million at the end of 3Q 2023 from $493.9 million on December 31, 2022. Total shareholder equity increased to $304.4 million from $204.4 million. The company is still very highly leveraged partially because they keep paying dividends instead of paying down debt, but at least I feel more comfortable now compared to earlier this year.

Balance Sheets 3Q 2023 and Y/E 2022

3Q and Nine Months Income Statement

Based on the latest data , Hyster-Yale is still ranked the #6 lift truck supplier. I used the same source in my 2021 article, but there has been a sharp industry improvement lately. The industry's total revenue declined 1.3% in 2020 from 2019, but the latest table shows the industry's total revenue increased 7.6% from 2021 to 2022.

Top 20 Lift Truck Suppliers 2022

Resolving Supply Chain Issues

A major reason I recommended buying HY back in October 2021 was a contrarian approach. I thought that the impact of supply chain problems, while they were severe, were "transitional" and that these issues would be worked out. The supply chain issues, however, got much worse and were compounded by soaring prices. Because this industry has very low profit margins to begin with there wasn't any cushion to absorb the higher costs. Orders were booked at prices that reflected costs at the time of the booking. Because of serious problems getting parts and raw materials, the delays meant their expected costs were much lower than the eventual actual costs, resulting in very small or even no profit margins. It also resulted in higher inventories of uncompleted products which were carried using expensive financing. The currently improved operating profit margins, however, continue to be below their 7% target.

Operating Profit Margins

Key to Hyster-Yale's Future: Robotics and Automated Lift Trucks

The primary reason I am keeping my long-term buy on HY is because I expect that over the next few years there will be a dramatic change in how most warehouses and manufacturing assembly lines function. The lifts, hand trucks, and forklifts will no longer be directly controlled by a human operator - it will be by robotics. There still will be a need to have lifts to move items around and the need to have Hyster-Yale lifts, but the lifts will be "high tech".

The problem for the lift industry is that most current operating lifts can't just be changed from manual operators to robotics by just buying some add-on robotic device. You need an entire new machine. That is both good news and bad news. The bad news is that many businesses don't want to spend large sums of money to replace existing lifts with new robotic lifts. The good news is the economics are strongly in favor of replacement. An example of the favorable economics was included in Hyster-Yale's recent presentation of a company with a warehouse that had 30 manual trucks and 60 lift truck operators transitioned to 40 robotic trucks and only eight operators.

Specific to Hyster-Yale is that they are not only doing robotic R&D internally they are also becoming associated with outside experts. In November, for example, there was an announcement that NTT DATA would help them develop robotic/automated lift technology. including IT/software engineering. This is significant, in my opinion. HY is capable of manufacturing the actual lift machine, but they need some additional "brain power" to get the robotics to operate efficiently. The robotic/automated lifts must have distinctive technology, so they are not just considered some generic/commodity type of equipment that have very low profit margins. If they are successful, it should open the opportunity for a dramatic increase in lift sales in the future. I am not looking at 2024 - I am looking more at 2030 when investing in HY.

There is the risk, however, that HY does not transition effectively to a robotic/automated lift product mix. Decades ago, the machine tool industry transitioned from completely manually operated machine tools to mostly automated machines. Many machine tool companies, especially domestic ones, failed. They manufactured great manually operated machine tools, but their automated ones kept having technical problems that they were not able to resolve so they went out of business.

Nuvera - Continues to Be a Major Negative

I already bashed Nuvera, their fuel cell company, in my prior article. It continues to accumulate massive losses on almost no revenue. For 3Q Nuvera reported revenue of only $1.5 million and an operating loss of $9.4 million. For the first nine months of 2023 Nuvera lost $28.4 million on revenue of just $4.1 million. They need to get rid of Nuvera. Since it can't stand alone via an IPO or spin-off because of their terrible financial condition, HY needs, in my opinion, to either sell it for a token amount or just close it down. Years ago, some investors were excited about Nuvera, but then reality hit, and they realized it has been a financial disaster. It continues to have a very serious negative impact on HY stock performance, in my opinion.

Outlook

New bookings have been weaker than prior periods and according to management they will continue to be weaker in 1Q 2024 but are expected to be higher for the entire 2024. The 3Q bookings were not that bad considering interest rates were so high during that period.

New Bookings and Backlog

Management does not give specific guidance numbers. They don't play "games" like some other companies who give specific guidance numbers and then try to beat them in order to generate some positive impact on the stock price. That is not their style of management. They focus long-term and not on short-term quarter to quarter results. The latest nine-month EPS is $5.82, and I am expecting $0.80 to $1.20 EPS for 4Q based partially on management's statement that 4Q "operating profit is expected to decrease from the strong third-quarter due to an anticipated mix shift toward lower margin sales channels, higher labor and manufacturing costs and increased operating expenses". Using the $1.00 EPS mid-point, the 2023 annual EPS should be around $6.82. Using the latest HY stock price of $62 results in a 9.1x P/E. These earnings and P/E include the terrible negative impact from Nuvera losses. Without Nuvera the earnings would be much higher, and P/E would be even lower.

While the Taplin/Rankin controlling family members may own HY stock for the $1.30 annual dividend, most other investors do not buy/hold HY stock for a 2.1% current dividend yield. The 9.1x P/E is relatively low if an investor expects significant future growth as warehouses and manufacturers transition to robotic/automated business models that include AI.

Conclusion

The supply chain issues were worse and lasted longer than I expected when I recommended buying HY in October 2021. The continued stock price drop reflected these problems combined with certain impairment charges in 2021. Currently, HY is up about 25% (35% total return) since that buy recommendation, but that is lower than the 50% I originally expected.

I continue to recommend buying HY for three reasons. First, there could be a very significant positive impact on the bottom line from future robotic operated lifts. Second, I expect the Nuvera problems will eventually be resolved by either selling it or closing it. Third, Hyster-Yale Materials Handling Inc. could be sold if the Taplin/Rankin family members finally decide that a sale is in the best interest for all shareholders.

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