Summary
- The share price plunged during the past year as a consequence of current headwinds.
- The company's margins are suffering, but not so much considering the current macroeconomic situation.
- The latest acquisitions in the aftermarket business should achieve some revenue and margin stabilization in the long term.
- Long-term debt should increase for as long as margins keep depressed and the number of shares outstanding could keep increasing.
- This represents a good opportunity for risk-tolerant investors.
Investment thesis
The Manitowoc Company ( MTW ) is not an easy company to be invested in and is also not a stock that should be held for too long due to its highly cyclical nature. Recently, the company has been making great efforts to expand its aftermarket activities, which are much less cyclical in nature and provide much more stable revenues, and these efforts have so far yielded positive results as revenues increased by 27% year over year in the aftermarket business during the last quarter. Still, the industry the company serves is cyclical itself, so we will always have a large component of cyclicality in the company's operations.
Furthermore, the company is currently facing a series of headwinds that will test its operations and balance sheet in the short and medium term. First of all, the macroeconomic landscape in Europe is causing a reduction in the backlog in the region due to customers' delayed crane replacement and issues in the company's capacity to complete customers' orders due to current supply chain issues, while a stronger-than-usual dollar is having a direct impact on the value of sales abroad. To this must also be added labor shortages and inflationary pressures, which are having a significant impact on profit margins, and increasing recessionary fears worldwide. In this sense, all these headwinds have caused a huge drop in the share price, which could open the door to a good opportunity to profit from a potential turnaround in the form of capital gains.
A brief overview of the company
The Manitowoc Company is one of the world's leading providers of engineered lifting solutions. The company designs, manufactures, and markets mobile hydraulic cranes, lattice-boom crawler cranes, boom trucks, and tower cranes through 10 manufacturing facilities across the world. It also offers aftermarket equipment parts and maintenance services. It owns the Aspen Equipment, Grove, Manitowoc, MGX Equipment Services, National Crane, Potain, and Shuttlelift brand names. These crane products are used in a wide range of industries, including energy production, distribution and utility, petrochemical and industrial, and infrastructure, such as road, bridge, and airport construction, as well as commercial and residential construction.
The company was founded in 1902 and its market cap currently stands at $363.10 million, employing over 4,500 workers worldwide. It paid an annual dividend of $0.08 per share in 2015 but canceled it after the spin-off of its foodservice business. Since then, it has been working on margin stabilization and, more recently, cyclicality reduction through acquisitions in companies with high exposure in the aftermarket industry. Nevertheless, it is very important to have an exit plan before venturing to invest as the industry for which it operates is naturally cyclical and strongly influenced by the economic situation in the world.
If we look at the share price chart, we can see the strong ups and downs in its price due to this cyclicality. Currently, the share price is at $10.32, which represents a 76.32% decline from relatively recent highs of $43.59 in January 2018 and a 62.09% decline from the most recent high of $27.22 in June 2021. Even so, it is very important to keep in mind that this investment carries a high risk since Manitowoc's potential turnaround depends mainly on a significant improvement in the macroeconomic landscape.
Recent acquisitions pursue margin stabilization
In December 2015, the company divested its Kysor Panel Systems business, a leading producer of wood frame and high-density rail panel systems for walk-in freezers and coolers for the retail and convenience-store markets, for ~$85 million. Later, in March 2016, the company completed the spin-off of Manitowoc Foodservice, which designed, manufactured, and supplied food and beverage equipment for the global commercial foodservice market, generating around $1.5 billion in net sales per year.
Since then, margins have been very tight and, in 2021, the company made two acquisitions to increase rental and aftermarket activities in North America in order to reduce the cyclical nature of its operations as customers often postpone purchasing new products during economic downturns and repair existing ones instead. One of these acquisitions was the crane business of H&E Equipment Services ( HEES ), one of the largest rental equipment companies in the United States, for ~$130 million. The other acquisition was Aspen Equipment, a diversified crane dealer and a leading final-stage, purpose-built work truck upfitter with strong aftermarket activities, for $51 million.
Finally, in October 2022, the company acquired certain assets of the crane rental fleet of Honnen Equipment Company and ended the dealer agreement with Manitowoc in Colorado, Wyoming, and Nebraska in order to increase its direct-to-customer reach.
Net sales are showing signs of improvement
The company's net sales are much lower than they have been in the past largely as a consequence of the spin-off of the foodservice segment and started to increase again in 2018 by 16.79%. Although in 2019 they were almost flat (decreased by 0.69%), the coronavirus pandemic was a setback for the company's results and net sales declined by 21.30% in 2020, but almost recovered in 2021 as the company reported a 19.18% increase.
Furthermore, net sales increased by 29.55% year over year during the first quarter of 2022, 7.25% during the second quarter, and 12.41% during the third quarter, boosted by a 27% increase year over year in non-new machine sales thanks to recent acquisitions. Thanks to this, the current trailing twelve months' net sales of $1.91 billion are 4.07% higher than the net sales of 2019 and 3.35% higher than 2018.
Net sales are expected to stand at $1.98 billion for the whole of 2022, which represents a 3.66% increase from the current trailing twelve months, boosted by a strong backlog, which currently stands at $943 million. Oil prices of ~$95 per barrel also promote crane demand in oil patch. Additionally, Manitowoc's customers have recently avoided replacing their cranes, which means the next economic cycle could have a significant tailwind in terms of current delayed demand. Still, ongoing parts and labor shortages and longer lead times for cranes pose a major risk as the company might not meet all the current and future demand.
Using 2021 as a reference, 38% of net sales are provided by operations within the United States, whereas 38% take place in Europe and 23% from the rest of the world. The company stopped taking new crane orders in Russia as a consequence of its conflict with Ukraine, but the impact of the measure has been very limited as net sales from Russia were less than 2% in 2021. Still, the conflict between Russia and Ukraine poses new risks for Europe, including inflationary pressures, rising interest rates, and a slowing of the recovery in some businesses of the company, including tower and mobile cranes. Furthermore, a stronger-than-usual dollar represents a headwind as net sales from international operations have less value in dollar terms. Now, management's eyes are on the Middle East, especially (but not only) due to Saudi Arabia's Vision 2030 initiative as it plans to spend $1 trillion on projects.
The recent recovery after the coronavirus pandemic crisis together with the current drop in share prices have created a scenario where the price-to-sales ratio is rock bottom at 0.192.
This means that the company generates $5.21 in net sales for each dollar held in shares by investors each year. This ratio is at very low levels compared to the past decade due to the recent fall in share prices despite increasing net sales as investors are giving less value to the company's sales as a consequence of unstable margins, growing fears of a potential recession in the short to medium term, rising interest rates, inflationary pressures, part shortages, labor shortages, and a stronger-than-usual dollar.
Those headwinds are numerous, and that is why the company is trading at what some could call near-catastrophic prices. If the macroeconomic situation improves in the medium term, the potential capital gains at this point are very significant, which makes this a good turnaround play for investors with more appetite for risk.
Margins are too tight but show some signs of stabilization
In 2016, management endured a cost restructuring program to align the company's production capacity with decreased demand and thus allow for increased operating efficiencies. One of these measures was moving its crawler crane manufacturing operations from Manitowoc, Wisconsin to Shady Grove, Pennsylvania, in order to save around $25-$30 million thanks to a more optimized manufacturing footprint and upgraded equipment. After a period of margin stabilization, especially after late 2017, the company achieved some margin improvement until it declined at the beginning of the coronavirus pandemic crisis due to restrictions, subsequent supply chain disruptions, and increased production and labor costs. Currently, the trailing twelve months EBITDA margin stands at 5.80% thanks to higher volumes, and the gross profit margin is at 17.15%.
As of now, supply chain issues and lower availability of parts pose a huge risk to the company's profit margins while inflationary pressures are already impacting them. In this sense, the gross profit margin declined to 16.34% during the third quarter of 2022 and the EBITDA margin by 5.56%. This has caused a huge deterioration in the cash from operations over the past twelve months to just $7.60 million.
Despite this, inventories have increased by $105 million since the third quarter of 2021, but accounts receivable declined by $8.1 million while accounts payable increased by $0.7 million. In this sense, the company now has a larger inventory, with which part of the drop in cash from operations of the last four quarters should soon be partially offset in order to buy a little more time while macroeconomic headwinds clear up a little.
Still, time is against Manitowoc as the company needs to cover annual interest expenses of ~$30 million, which have increased recently as a result of an increase in long-term debt, and capital expenditures of $50 million, which should stabilize at a lower level once recent acquisitions are fully integrated to the company's operations.
In June 2022, the company decided to withdraw from the CONEXPO-CON/AGG 2023 trade show due to the recent increase in its products, but luckily, things are starting to look slightly better for inflationary pressures in the short term as the company uses vast amounts of steel for the manufacturing process of its products and the price of iron ore is falling at a very fast pace.
Iron Ore commodity price (Tradingeconomics.com/commodity/iron-ore)
This should slightly help reduce the company's losses and avoid borrowing too much cash while waiting for the macroeconomic landscape to improve.
Long-term debt should keep rising until current headwinds ease
Since the divestment of the foodservice business, the company's debt has remained stable until late 2021 when it increased by $100 million to $400 million due to the acquisitions that took place in that period. Furthermore, cash on hand also declined significantly in order to fund these acquisitions. More recently, the debt has increased again to $412 million while cash on hand is at very low levels of only $43 million. In this sense, a lengthy margin recovery would certainly force the company to keep adding debt to its balance sheet, a risk that is in part reflected in the current depressed share price.
What is unknown is how long it will take for the headwinds to give the company's operations some oxygen. Therefore, investors looking to profit from Manitowoc's turnaround process will need to demonstrate their risk appetite and patience along the way.
Risks worth mentioning
- The company is currently facing a set of headwinds that have pushed its share price to the ground. Supply chain issues, difficulties in finding necessary parts for the manufacturing process of its products, delays in shipments, inflationary pressures, labor shortages, and a stronger-than-usual dollar are putting a strain on the company's balance sheet, and there's no way of knowing how long it will take for these headwinds to relax enough for the company to see relief.
- The company has a strong cyclical nature and its operations are directly linked to the macroeconomic situation and customers' availability of financing. During recessionary times, demand for the company's products declines, and volumes do so as well as a consequence. If the current headwinds are preceded by a deep enough recession, demand for the company's products would be reduced, and with them profit margins and cash from operations.
- If profit margins continue to be depressed or, worse yet, continue to fall, the company could be forced to use debt to survive current macroeconomic headwinds, and the same goes for a significant reduction in volumes. As I explained, this is a very likely scenario and is the price investors must pay for the current discount in the share price.
- Chinese competitors have increased production capacity significantly during the past five years while its economy is weakening. As a consequence, if the Chinese economy continues to deteriorate, China's exports to the world at overly competitive prices could increase.
- Share dilution is also something that should be monitored by investors. The company announced a share repurchase program of up to $30 million in May 2019, and although the total number of outstanding shares began to decline since then, the coronavirus pandemic crisis scuppered the company's plans to buy back shares and share dilution is once again a reality at Manitowoc, although the number of shares has only increased by 6.67% during the past decade.
Conclusion
Betting on Manitowoc's turnaround will require risk appetite and patience on the part of investors, I don't have much doubt about that, but I believe the situation is actually not bad enough to forecast a disaster. While it is true that there are many headwinds, it is also true that, despite them, profit margins have been quite resilient in recent quarters. The company is making great efforts to expand its aftermarket business, which is already showing results and should achieve some stabilization in margins in the long term. The current drop in the prices of iron ore should also help improve cash from operations in the coming quarters, especially now that the price of the company's products has increased.
The company still has plenty of room to get through the storm clouds ahead, but it is important to understand that the longer the complexities in the macroeconomic landscape last, the greater the damage to be repaired will be since the two weapons that the company has to defend itself against current headwinds are more debt and more share dilution. Even so, the current fall in the price of the shares shows that investors expect a worsening of operations in the medium term, which means this could be a good opportunity for the most daring investors who want to profit in the form of capital gains once the company's prospects improve.
For further details see:
The Manitowoc Company: A High Risk/High Reward Turnaround Play