Should You Buy This Stock at Its Current Levels?
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A pixie dust product is one which makes another product better, and is itself not a significant contributor to the total cost of that particular product. Material handling products supplied by Columbus McKinnon (NASDAQ: CMCO) have this kind of characteristic, which protects the company with an economic moat. However, valuations are currently fair, but unattractive for this stock.
Columbus McKinnon is a leading worldwide designer, manufacturer, and marketer of material handling products, systems, and services, which efficiently and ergonomically move, lift, position, and secure materials. Its key products include hoists, rigging tools, cranes, actuators, and other material handling products serving a wide variety of commercial and industrial end-user markets.
Columbus McKinnon is the U.S. market leader in hoists, its principal line of products; and the market leader of manual hoist and actuator products in Europe.
Moats that matter
The improvement of customers’ products/services and a low selling price relative to the total product/service cost are two key components of a pixie dust product. Most, if not all of Columbus McKinnon's products meet these criteria.
Firstly, customers rely on its hoists and other lifting and positioning products to lift and place loads faster and more accurately with less labor, with the aim of cutting down on cycle time and increasing productivity. Secondly, according to its 2012 10-K, more than 80% of Columbus McKinnon’s revenue was generated from products with unit prices less than $5,000.
While Columbus McKinnon has set targets of deriving two-thirds of its future revenue from developing markets, and put aside $200-$300 million for acquisitions, I prefer to focus on the more certain types of growth, such as increasing market share through cross-selling.
With a network of 15,000 general & specialty distributors, end users, and OEMs globally, Columbus McKinnon’s extensive distribution channels allow it to effectively market new product line extensions to existing customers. Cross-selling efforts are further supported by its strong brand names and large installed base. Among its various brand names, Columbus McKinnon’s Yale and CM names are synonymous with hoists, and have been in existence since the early 1900s.
Besides providing recurring revenue from repair and replacement parts, a large installed base of products also helps Columbus McKinnon to sell its other products to existing customers. Intuitively, it is easier to incentivize existing customers to buy new products than winning new customers.
Alamo is a leader in the design, manufacture, distribution, and service of high quality equipment for right-of-way maintenance and agriculture. The key revenue drivers for Alamo Group are government spending on infrastructure maintenance and agricultural/farm income. Alamo Group maintains a relatively debt free balance sheet to create debt capacity for future acquisitions. It also has an excellent capital return track record, having paid quarterly dividends since 1993.
Deere & Company manufactures and distributes agricultural and turf equipment, and construction and forestry equipment. It also has a financial services segment, which finances sales and leases by its dealers of new and used equipment. Deere has a well-defined capital allocation policy, returning excess capital to shareholders through both dividends and share buybacks.
Since 2004, Deere has spent $9.3 billion in total to repurchase shares at an average price of $57.30. It also has a target 25%-30% dividend payout ratio of mid-cycle earnings, and currently sports a trailing twelve months dividend yield of 2.2%.
Created in 1999 through the merger of New Holland N.V. and Case Corporation, Netherlands-based CNH Global is a manufacturer of both agricultural and construction equipment. It has a network of approximately 11,500 dealers in approximately 170 countries, with 37 manufacturing facilities located across the world.
Using forward P/E as a valuation method, all the four stocks, with the exception of Alamo Group, are valued similarly at 8-10 times forward P/E. With a forward P/E of 15, Alamo Group trades at a significant premium to its peers, by virtue of the strength of its balance sheet.
Alamo Group is almost debt free with a gearing of 0.2%.If enterprise valuation metrics are employed instead, Columbus McKinnon trades at a slight discount to the peer group with a trailing twelve months EV/EBITDA of six. In contrast, the other three stocks are valued by the market at seven to nine times EV/EBITDA.
Investing in overvalued companies is probably a recipe for investment failure, notwithstanding the presence or absence of an economic moat in the stock. Columbus McKinnon is not compelling at current valuations, especially with its relatively high gearing of 80% and the lack of dividends.
Mark Lin has no position in any stocks mentioned. The Motley Fool owns shares of Alamo Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!