Lift your Portfolio with this Company
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I love finding a company that produces equipment needed by nearly every warehouse or production facility in the world, and I really love finding a company that is the leading producer of arguably the most critical component of that equipment. Good luck running a warehouse without a forklift, and even better luck using that forklift without the forks! Cascade Corp. (NYSE: CASC) is a leading manufacturer of "materials handling load engagement products" -- in English, the attachments for forklifts. It's a pretty small company, $500 million market cap, and I was first attracted to the company by its cheapness.
There's a lot to like about the valuation, but it also begs the question of why the stock is priced so cheap. Annual sales grew 30% each of the last two years and net income tripled from 2011 to 2012. This looks impressive, but going back further in history reveals the company took major hits during the recession, and 2012 revenues were still below 2008's. The company dropped 20% of its workforce in 2010 and has only recovered half of those jobs. The real question is whether the company can continue growing from here. To figure that out, I need to think about the forklift market.
Modern Materials Handling is a business-to-business trade magazine for this industry and has a wealth of information, including industry projections. The latest Material Handling Equipment Manufacturing Forecast shows new orders growth slowing from a robust 24% in 2011 to 8% in 2012 and 6% in 2013. The 2013 forecast was revised down from 12% back in April, a pretty significant drop in expectations in just a few months. Spending on new equipment has stalled and shows little sign of increasing over the next 18 months, as indicated in this graphic from the MMH 2012 Industry Outlook:
The latest earnings report from Cascade confirms this. Sales only grew 3% y-o-y while inventory grew 18%, and orders were down 8% in the Americas, 2% in Europe, and 3% in China. Most of the inventory growth was in finished goods, another worrying sign. The next release is Aug. 30, and I'll be interested to see if this trend continues.
So there are certainly headwinds in the near future, but the company has many strong attributes to weather the storm. For starters, the company has $27 million in cash and only $5 million in debt. This is a rosy picture compared to just a year ago when the company has $25 million in cash and $42 million in debt, especially when the debt was not paid off by raising more equity capital. The CEO has been in the job since 1996 and has 17% ownership, so I know his interests are in line with those of shareholders.
Best of all, the company is the world leader in forklift handling equipment, with a 45% global market share. Primary competition in the United States are regional private companies that lack the reach and relationships Cascade has with the major original equipment manufacturers (OEMs). I was surprised to learn that Toyota (NYSE: TM) is the largest manufacturer of forklifts. Unfortunately, the company does not separate these products out in their financials, so it's difficult to gain insight in the industry from an OEM's perspective. Nacco Industries (NYSE: NC) is a major forklift producer in the United States that also makes mining equipment and some specialty retail items. Their latest earnings report showed weakening sales in their material handling segment, although the full 2012 outlook predicts level or slightly higher sales in all regions except Europe. Also of interest, in the third quarter this segment is going to be spun off into a new public company, Hyster-Yale. I'm going to keep my eye on that one.
I think short-term trends are going to hold Cascade down for maybe a few years, but barring some catastrophic event, things will eventually turn around in Europe and the United States will claw itself out of our slow recovery. When these things happen, production will increase and companies will have to invest in material handling equipment. I do not own any shares currently but am waiting for some capital to free up in the near future to start a position.
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