Manitowoc: Cyclical Bottom, Building a Higher Future

Manitowoc (MTW), as the dominant manufacturer of building cranes, has long been considered a cyclical company. In recent times, the company has been working to reduce the cyclicality of their business. They divested their legacy Manitowoc Marine business and greatly expanded their Manitowoc’s Foodservice business with the acquisition of Enodis. Originally they were only on the cold side of foodservice, offering ice machines, walk-in coolers, etc. With the purchase of Enodis, they have expanded to the hot side as well offering ovens, steamers, fryers, etc.

Consequently, since 2007, Manitowoc has morphed into a more balanced and hopefully less cyclical enterprise. In 2007, they were 83% cranes, 11% foodservice and 6% marine. Today they are transformed into 70% cranes and 30% foodservice. Unfortunately, this transformation occurred as the world entered the severe recession of 2008. In the short run, the recession was devastating to the company’s profits. However, the longer run may prove to be very rewarding to shareholders.

In the long run, earnings determine market price. Whether earnings go up, down or sideways, a company’s stock price will inevitably follow. Also, the rate of change of earnings, not the stock market, will be the driver of shareholder’s percentage results. Manitowoc’s historical 20-year earnings and price correlated graph offers stark evidence of this price and earnings thesis. Figure 1 below, shows how strongly Manitowoc’s stock price has correlated and followed its earnings results since 1991.

Figure 2 below shows how Manitowoc’s earnings growth of 12.2% per annum has translated into shareholder appreciation of 10.5% compounded. Clearly, shareholder returns correlated closely to operating results and were much stronger than the general market (S&P 500) return of 6.3% compounded. Add in dividends, and long-term shareholders were well rewarded.

MTW returns to shareholders since 2006 tell a dramatically different story. The correlation between earnings and market price is still intact, but with markedly different results. Also, once again, Manitowoc’s esults were driven specifically by their operating performance and not the general market (S&P 500). As Figure 3 depicts, Manitowoc’s performance of a minus 14% compounded loss since 2006 is significantly greater than the market (S&P 500) loss of minus 5.4% compounded.

Today’s Manitowoc is a more diversified company operating in two diverse business segments. The crane segment builds, sells, leases and finances crawler cranes, tower cranes, rough terrain and all-terrain truck cranes and boom trucks and industrial cranes. Their Manitowoc brand is the world leader in high capacity lattice-boom crawler cranes. The Potain brand is the world leader in top-slewing and self-executing tower cranes. Finally, the Grove and National Crane brands are world leaders in mobile telescopic cranes and boom trucks.

As the economies of the world recover from the recession, the building and rebuilding of infrastructure worldwide is expected to rapidly resurge. Manitowoc’s end markets are heavy construction, energy, bridges and highways, infrastructure, commercial construction and high density residential. Manitowoc derives 42% of crane sales from the Americas, 46% from EMEA (Europe, Middle East and Africa) and 12% from Asia. They are especially well positioned in rural China. New cranes represent 90% of Manitowoc’s sales mix, and aftermarket support represents 10%.

Figures 4 through 6 are slides Manitowoc presented at the Deutsche Bank Leveraged Finance Conference on October 1, 2009, in Scottsdale, AZ. As the charts illustrate, Manitowoc’s crane business is well diversified across many attractive end markets.

Manitowoc’s Foodservice segment, now 30% of sales offers both growth and stability to future earnings and cash flows. Although the Enodis acquisition arguably leveraged Manitowoc’s balance sheet at an inopportune time short term, the longer term benefits to the company and its shareholders are potentially large. Enhanced stability of earnings, a broader full service capability of both hot and cold-side equipment offer additive benefits.

The following four slides from the Deutsche Bank Leveraged Finance Conference on October 1, 2009 in Scottsdale, AZ highlight the foodservice opportunity.

Manitowoc reports earnings at the close of business today, 10/29/2009. As of the time of this writing, the market is positively anticipating the announcement as the stock is up approximately 11%. Yesterday, company directors approved a 2-cent regular quarterly dividend but announced the switching to an annual common stock cash dividend thereafter.

Whether tonight’s earnings report is good or bad is not the real story for Manitowoc. The true Manitowoc story lies in the future. Two or three years out, the possible values for this well run mid-cap company are intriguing, to say the least. For sure, there are issues to overcome; a leveraged balance sheet is a big one. On the other hand, Manitowoc offers industry leading brands in all areas of their business. Therefore, future growth potential off of distressed values is large, albeit risky. This opportunity is only available to the patient investor willing to hold for at least the next business cycle of 3 to five years.