2023-06-29 12:22:42 ET
Summary
- The Manitowoc Company experienced an 87% surge in shares since November, with strong 1Q23 earnings and healthy order growth contributing to this positive trend. The company's focus on non-new machine sales and refurbished equipment has also proven successful.
- Despite this positive performance, uncertainties in the global construction industry warrant caution. The company's shares have rallied without support from key leading indicators, and ongoing economic weakness could potentially impact new orders.
- I believe that a correction in MTW shares or positive economic momentum could lead to a bullish outlook. Long-term growth prospects and secular tailwinds support the expectation of new highs for the company in the next 1-2 years.
Introduction
In November, I wrote an article titled Manitowoc: This Looks Like A Bottom! Since then, shares have risen 87%, beating the market by almost 80 points. Hence, in this article, we're going to assess the risk/reward of The Manitowoc Company ( MTW ) after this impressive surge.
We'll discuss strong 1Q23 earnings, healthy orders, concerns regarding weakness in certain markets, and what all of this means for the risk/reward.
So, let's get to it!
The Original Bull Case
Initially, Manitowoc's favorable valuation was a compelling factor. While supply chain problems were still persisting, the easing of bottlenecks was expected. The stock had dropped below $10 once again, indicating a potential opportunity.
Additionally, the company's historical recoveries during economic rebounds were noteworthy.
Furthermore, I highlighted the economic cycle's impact on MTW and how it was closely tied to the company's stock price. Economic growth had declined, as indicated by the ISM manufacturing index and its new orders component. Manitowoc's third-quarter results confirmed this trend, with lower-than-expected revenue and a decline in new orders, particularly in the EURAF segment, due to softening macroeconomic conditions.
However, despite these challenges, Manitowoc had a solid business foundation. It had a significant backlog of $943 million, albeit impacted by supply chain problems. The company also benefited from consistent monthly new orders, which were unusual in the volatile crane business. Moreover, the global crane market was expected to experience substantial growth, offering a positive outlook for Manitowoc.
The company also invested in new areas of growth, like rental services and lower-cost refurbished equipment, while it was trading at just 5.6x 2023E EBITDA.
MTW Did Very Well In 1Q23
Instead of giving you my view on the economy before discussing the company's new results and developments, I will mix the two, as Manitowoc is a fantastic source of macroeconomic comments that tell us a lot about the health of global construction markets.
After all, the machinery producer with a market cap of $650 million has operations in all major economic regions of the world. Last year, the company generated $2.0 billion in revenue. Only half of this came from the Americas. With brands like Manitowoc, Potain, and MGX, the company has a major footprint in the Middle East and Asia Pacific, as well as Europe.
With that said, in the first quarter, the company did very well.
Net sales for the first quarter were $508 million, marking an 11% increase compared to the prior-year quarter. Growth was attributed to higher volume and pricing, driven by a stronger shippable backlog, primarily in the Americas, and increased sales of non-new machines.
The non-new machines segment was also highlighted in my prior article, as MTW (like some of its major peers) has figured out that refurbishing used equipment reaches cost-cautious customers with limited budgets. By 2026, the company hopes that refurbished sales will reach $675 million, which would be an improvement from currently less than $570 million.
With that said, non-new machine sales rose by 17% to $151 million in the first quarter. However, net sales were unfavorably impacted by $11 million due to changes in foreign currency exchange rates, which is why I highlighted the company's significant non-dollar exposure.
The company also benefits from an elevated average equipment age.
The good news continues, as the company achieved an adjusted EBITDA of $45 million in the first quarter, which is a significant increase of $14 million or 45% compared to the previous year.
The adjusted EBITDA margin improved by 210 basis points over the prior year, reaching 8.9%. This improvement was caused by better-than-expected price realization and mix.
Furthermore, these results allowed the company to improve its balance sheet.
The first quarter ended with a cash balance of $56 million, which is an $8 million decrease compared to the previous quarter. Total outstanding borrowings under the Asset-Based Lending facility decreased by $10 million to $70 million. The company also repurchased $4 million of its common stock during the quarter.
Total liquidity remained unchanged at $296 million. Strong adjusted EBITDA resulted in a net leverage ratio of 2x at the end of the quarter, which is well below the targeted level of 3x. This paves the way for more buybacks in the quarters ahead - if supported by solid business fundamentals.
With that said, growth in new orders is even more important than sales and EBITDA growth. After all, that's what drives future revenue growth. It also tells us a lot about industry health.
In the first quarter, the company's orders surpassed expectations, reaching $525 million, which is a 9% increase compared to the previous year.
- The rise in orders was primarily driven by higher demand in the Americas segment. However, the ERF segment experienced lower orders due to near-term uncertainty.
- Foreign currency fluctuations had an unfavorable impact of $9 million on orders.
- The backlog as of March 31 remained relatively flat sequentially at $1.076 billion but saw a 4% increase year-over-year. Orders on a TTM basis reached a new high for the third-consecutive quarter.
- The majority of the backlog was in the Americas region, while Europe experienced a decline.
This brings me to the outlook.
Outlook: MTW Sees Weakness & Opportunities
Related to its new orders, the company noted that in the US, concerns about financing and higher interest rates have surfaced. This is impacting customer sentiment.
Manitowoc anticipates a potential buildup of inventory if retail activity slows down.
This is what manufacturing sentiment looks like in the United States:
In Europe, the tower crane business has experienced a slowdown caused by rising interest rates and the ongoing Ukraine crisis. Although the mobile crane business has seen increased rental rates, customers have adopted a cautious approach.
This is what manufacturing sentiment looks like in Europe:
However, the Middle East showed promise due to initiatives like Saudi Vision 2030, driving earthmoving and road-building projects. Tower crane activity has also spiked in Turkey following a devastating earthquake. China's market has yet to rebound, but South Korea, Hong Kong, and Australia have demonstrated strength. Southeast Asia, particularly Singapore, remains relatively quiet.
Based on everything so far, the company is maintaining its guidance, which shows that strong 1Q23 results are overshadowed by doubts when it comes to the remainder of the year.
According to the company :
Given these factors, we are maintaining our previously published guidance. At this time, it’s extremely difficult to predict how the next 12 to 24 months will unfold as the global economy normalizes to the recent shock treatment of higher interest rates, geopolitical tensions and of course, the U.S. presidential election, which is beginning to heat up.
Valuation
Despite its 100% year-to-date rally and a strong 145% surge from the 52-week low, MTW shares continue to trade well below their prior-cycle lows.
Here's why the risk/reward is so tricky:
- MTW shares have rallied without support from key leading indicators that have supported every upswing so far.
- The main drivers of the surge were pent-up demand caused by the pandemic and overall elevated equipment age, and government-backed investments in commercial construction.
If economic growth were to bottom within the next 1-2 months, MTW would be in a good spot to recapture prior-cycle highs.
However, rates likely remain elevated on a prolonged basis as the Fed is fighting sticky inflation. Meanwhile, ongoing economic weakness could hurt new orders. This could cause MTW shares to correct from current levels before moving higher with support of higher economic growth in the future.
With that said, on a long-term basis, MTW expects to grow adjusted EBITDA to more than $275 million.
This year, EBITDA is expected to come in at $154 million versus $143 million in 2022.
Using the company's market cap, $300 million in expected 2023 net debt, $60 million in pension-related liabilities, and $154 million in expected EBITDA, MTW is trading at 6.6x 2023 E EBITDA.
Based on the company's developments and secular tailwinds, I stick to my belief that MTW will make new highs in the next 1-2 years.
However, I do not believe that it will be an easy ride. Investors who are sitting on large profits might consider taking some money off the table. I'm now changing my rating to neutral. I will change it to bullish if MTW shares correct 15-20% and/or if economic growth starts to show upside momentum. After all, that's what MTW needs to continue this uptrend.
Takeaway
Manitowoc has experienced a remarkable 87% surge since my previous article, outperforming the market by a significant margin. Strong 1Q23 earnings and healthy order growth contribute to the positive outlook, despite concerns about certain markets.
In addition, its focus on non-new machine sales and refurbished equipment has proven successful.
The financials are encouraging, with improved adjusted EBITDA, a strengthened balance sheet, and a favorable net leverage ratio.
However, uncertainties in the global construction industry, such as financing concerns and geopolitical tensions, warrant caution.
Although a correction may occur in the near term, long-term growth prospects and secular tailwinds support the expectation of new highs.
While I change my rating to neutral, I believe that a correction in MTW shares or positive economic momentum could lead to a bullish outlook.
For further details see:
Manitowoc's Share Price Surge: Evaluating The Road Ahead