Why This Stock is Not a Great Bet Despite Good Numbers
Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Expectations from Manitowoc (NYSE: MTW) were high, especially after peers reported good numbers. While the crane maker managed to beat on the bottom line in its second quarter, its revenue failed to impress. Yet, it was a breather for the stock after weak results in the first quarter had sent its stock crashing 10% in a single day. This time around, it’s trading up around 3% after results. So will Manitowoc be able to maintain the momentum; and is it worth a bet right now?
At first glance, the jump in Manitowoc’s net profits to $42.5 million from $3 million a year ago is enough to blow up anybody. But it’s important to note that the company’s profits were low last year largely because of a big one-time charge on debt extinguishment. Yet, Manitowoc’s performance was no less impressive even after excluding one-time items from both quarters – profits more than doubled on a year-over-year basis. Manitowoc’s top line, though, fell short of expectations, rising 6% from the year-ago period to $1 billion. While sales in its crane division rose 10%, its food service equipment division lagged with flat revenue.
Crane division’s top line growth was pretty much similar to what peers had reported. Sales in industry king Caterpillar’s (NYSE: CAT) largest division, construction industries, rose 8% in the last quarter as the North American market strengthened. Terex’s (NYSE: TEX) second-quarter top line too climbed 11% (excluding the impact of acquisitions) backed by higher construction activity in the U.S.
Crane backlog value in Manitowoc’s first quarter was at its highest since the financial crisis. The growth continued in this past quarter, with backlog value rising 13% from the comparable period last year. Backlog is a key indicator of potential future revenue, so any increase is good. Orders were up 7% as well.
Strength in the U.S. market should keep Manitowoc’s crane business going. Its expansion program in Brazil is also on track, with the new crane facility up and ready. This is the first such facility in the region dedicated to manufacturing rough-terrain cranes. Opportunity is huge as the nation gears up for two huge events -- the 2014 World Cup and the 2016 Summer Olympics. No wonder Terex too delivered its first ‘Brazilian built rough-terrain crane’ recently.
I am a foodie too!
I had earlier mentioned how Manitowoc’s large presence in Europe looms as a major concern. Slow demand from the region hurt its food service equipment division’s top line, offsetting growth from stronger markets like Asia Pacific. Yet, its newly launched products continue to do well. Indigo ice machine, in particular, has won several accolades and is emerging as a key revenue driver for the company.
The second quarter proved again how highly McDonald’s (NYSE: MCD) thinks of Manitowoc’s products. The fast-food king is an old and loyal customer, and continues to acknowledge Manitowoc’s expertise through awards. It presented three awards to the company this past quarter. McDonald’s also recognized Manitowoc for contributing to its growth, particularly in the Asia Pacific market. This region is a top priority growth market for the equipment maker, and most of its investments are going into these markets -- a strategy very much in line with what other top food chains. We all know how aggressive McDonald’s is getting in Asia; the same goes for Yum! Brands, which is also a Manitowoc customer. As these companies grow bigger, so will Manitowoc.
Is it worth it?
Manitowoc is expecting its crane segment revenue to grow by 10% to 15% for the full year, while its other divisions should see mid-single digit top line growth. Market expectations for the company going forward are high, as evidenced by its low forward P/E of 9.
Yet, it might not be the best bet in the sector, considering its exposure to Europe, limited presence in developing markets, and huge debt load. The stock is also trading at 21 times trailing P/E, which is definitely on the higher side of the scale. Why not consider Caterpillar instead, which not only dominates the market but also has tremendous growth potential in the mining sector, and even trades at a trailing P/E of under 10?
But that doesn’t mean I am writing off Manitowoc. The way it has bounced back after the financial crisis is impressive. Its top line is growing healthily too, and so are margins. The only area where the company needs to work really hard is easing its debt burden. Its total debt-to-equity ratio is at a whopping 401%, while its interest coverage is a mere 1.5 times. It is expecting ‘substantial deleveraging’ in the next two years. Once that gets on track, Manitowoc could make for a solid long-term bet. Stay tuned as the company turns its weaknesses around by adding the stock to your watchlist. Click here to do it.
Neha Chamaria has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend McDonald's. 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.If you have questions about this post or the Fool’s blog network, click here for information.