2023-04-20 11:17:57 ET
Summary
- HY's top line growth should be driven by healthy bookings and backlogs, new product development, and technological advancement.
- Bottom line should benefit from improvement in supply chain constraints, higher-priced backlog, and moderation in inflation.
- I have a buy rating on the stock.
About the company
Hyster-Yale Materials Handling ( HY ) is a leading full-line lift truck manufacturer. The company also offers a broad array of solutions, including attachments for lift trucks, telematics, automation, fleet management services, and hydrogen fuel cell power products. HY has three operating segments: Lift Truck, Bolzoni, and Nuvera. In the lift truck segment, the company manufactures and sells lift trucks in the Americas, EMEA, and Asia-Pacific regions. In the Bolzoni segment, the company builds and distributes attachments, forks, and lift tables. Under the Nuvera segment, the company designs, manufactures, and sells hydrogen fuel cell stacks and engines. In 2022, the company generated 73% of its revenue from lift trucks, 15% from parts, 7% from services, rental, and others, 5% from Bolzoni, and less than 1% from Nuvera.
HY's segment distribution (HY's investor presentation)
Lift Truck business
HY generates approximately 95% of its revenue from the lift truck business. In 2022, the revenue in this segment increased by 16% Y/Y to $3.36 billion, driven by higher pricing and higher volume, partially offset by unfavorable foreign currency translation. The unit shipments in the fiscal year stood at 100,800, which is 6% above the prior year.
Looking ahead to 2023, I believe the demand in the lift truck business is expected to be moderate and should be low compared to 2022, due to the weak macroeconomic conditions. Based on the company's internal data, the global lift truck market across all geographies declined in the fourth quarter of 2022. The unit bookings in 2022 were lower compared to the prior year due to the strong demand in 2021 and longer lead times. I believe this should continue in 2023 due to slowing economic conditions and the company's focus on booking orders with higher margins. Despite these declines, I believe the market should remain above its pre-Covid levels. Although lower bookings and increased production rates have led to a decreased backlog in 2022, it still remains well above the company's historical averages. The increased order selectivity and higher production rates have led to higher average unit prices in the company's backlog. As the global supply chain constraints and component availability improve over the next few quarters, HY should be able to convert its backlog into revenues.
Lift truck business' unit bookings and backlog (Created by DzD Analysis by taking data from HY)
Despite these near-term headwinds, the company is continuing to execute its strategic initiative, which includes the introduction of new modular and scalar products as well as projects geared towards electrification and providing technology advancements. The initial modular, scalable products are currently being introduced in the Americas, and the company plans to introduce them in the Asia-Pacific market in mid-2023. The company is developing an electrified fuel-cell reach stacker and has started the pilot phase of its fuel-cell powered container handler using Nuvera fuel-cell engines. HY also plans to introduce its modular automated products in late 2023, which should provide great value to its customers through operator-free and continuous operations.
The company is also focusing on transforming its sales process by using an industry-focused approach to meet the needs of its customers. HY is bringing in digital solutions to enhance its customer experience and is strengthening its distribution footprint.
Operating margin chart (Created by DzD Analysis by taking data from HY)
On the profitability side, the lift truck business' margins declined significantly in 2021 due to the non-cash goodwill impairment charge in Asia, the valuation allowances on deferred tax assets, and inflationary raw material and freight prices. However, in 2022, the margins rebounded due to the absence of impairment charges, favorable pricing, and unit and parts volume, partially offset by inflationary costs.
Looking ahead, the lower margins products in the company's backlog are expected to be completed in the first half of 2023. Once completed, this should improve the margins in 2023. Additionally, fewer part shortages and increased manufacturing efficiencies as component shortages moderate should lead to increased production and shipments in 2023. Furthermore, a lower inflation rate, ongoing benefits from the company's cost-saving initiative, and disciplined price increases should improve margins in 2023. The company's current backlog of higher-margin products extends through 2023 and 2024, which should sustain the company's margins during a downturn in the economy.
Bolzoni and Nuvera business
The Bolzoni and Nuvera businesses together contribute 5% to the total revenue of the company. The Bolzoni business' revenue increased by 2.3% Y/Y and Nuvera's revenue increased by triple digits in 2022. Bolzoni continues to concentrate on driving its "One Company - 3 Brands" approach and increasing its Americas business, while focusing on strengthening its ability to serve key attachment industries and customers in all global markets. Nuvera announced several projects in 2022 with various third parties to test its fuel cell engines. These projects are expected to be executed in 2023.
On the profitability side, Bolzoni reported an operating profit of $6.2 mn in 2022, compared to a loss of $1.8 mn in 2021. Looking ahead, the continued moderation in component shortages, increased customer demand, and further pricing gains in 2023 should result in improved profitability in 2023 compared to 2022. Additionally, the company is streamlining and strengthening its operations, which should help improve margins in 2023.
Nuvera is a loss-making business. The business reported an operating loss of $34.3 mn in 2022 due to the impairment of PP&E and inventory losses. However, in 2023, I believe the benefit from the ramp-up of certain product demonstrations and bookings should help offset higher costs. This should lead to an operating loss in line with 2022.
Valuation
In my DCF calculations, I am assuming revenue growth to be in the low-double digits in 2023 given the healthy order backlog and bookings. Beyond 2023, I have assumed growth to be in the mid-single digits, with a terminal growth rate in the low-single digits, as the company will continue to benefit from the demand for lift trucks and parts given the large installed base. I used a discount rate of 6.96% by using the cost of equity of 7.85% and arrived at a fair value of $74.44 for HY.
Using the relative valuation, the stock is currently trading at 24.28x FY23 consensus EPS estimate of $2.17 and 19.12x FY24 consensus EPS estimate of $2.76. This is well below the five-year average forward P/E of 34.42x.
Risks
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The demand in 2023 is expected to moderate but still remain above pre-pandemic levels for the company's lift trucks. If the macroeconomic conditions weaken more than expected, HY's bookings should be impacted.
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Raw material costs are difficult to predict and they might affect the company's profitability if there's an increase.
Conclusion
In summary, I have a buy rating on the stock given the healthy revenue and margin prospects and lower valuation. Hyster-Yale's revenue should continue to grow in the coming years due to healthy bookings and backlogs, new product development, and technological advancement. The profitability, which has been negative over the last two years, should improve in 2023 and beyond given the improving supply chain constraints, moderating inflationary costs, and pricing actions. Hence, I am optimistic about the company.
For further details see:
Hyster-Yale Materials: Lifting Up The Business