Why Staying Away From This Stock Makes Sense

Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

They thought it will emerge unscathed from global slowdown and prove better than peers. It failed them miserably. A victim of unreasonable expectations, I must say.

Manitowoc (NYSE: MTW) tanked as it missed analyst estimates on both top and bottom lines by wide margins – something I had predicted would happen. Slashed full-year outlook only added fuel to the fire. Peers Caterpillar’s (NYSE: CAT) and Terex’s (NYSE: TEX) muted numbers and outlook were handy precursors, which clearly made it look next to impossible for Manitowoc to live up to Street estimates of 12% higher revenue and 61% more profits in its third quarter.

Despite Terex’s disappointment, I thought it’s a stock worth watching. I tried to go deeper into Manitowoc’s numbers as well to see if I can find any similarities, but here’s what I concluded: the road ahead looks tough. Just one management comment sums it up for Manitowoc.

Biggest pain

Europe remains Manitowoc’s foremost and biggest challenge --the third quarter proved it yet again. The market, which accounts for more than 20% of Manitowoc’s total sales, fared worse than the company expected during the quarter, hitting sales and margins in both its business segments. With no improvement in sight, Manitowoc has lowered its revenue outlook for the year. It expects its crane division’s revenue to grow by 10% to 12% while foodservice-equipment business sales to rise by low-single digit percentage only. Clearly, as long as Europe remains sluggish, so will the company’s sales growth.

Bent shoulders

What makes matters worse is the company’s humongous debt load. At 386%, its total debt-to-equity ratio is anything but comfortable. An interest coverage ratio of 1.8 times, cash equivalents of $69 million, and free cash flow of around $44 million seem too low for debt (long term) levels of $1.9 billion. Manitowoc’s operating (earnings before interest and tax) margin isn’t too great either at 6.9% (they’ll remain under pressure unless the top line grows).

Manitowoc intends to repay about $150 million this year. I don’t think that helps much. Apart from adding to interest costs, such high leverage also limits the company’s scope to expand or return value to shareholders. Manitowoc pays out only 13% of profits as dividends, and yields a meager 0.5% currently.

Home’s comforting

If Europe is a pain, the only market that can keep Manitowoc running is the U.S. Sales in its cranes division grew 5% from the year-ago quarter, which was better than that of peers. While Terex’s third-quarter revenue was up a mere 1% from a year ago, Caterpillar’s construction industries division sales were absolutely flat year-over-year. But the common factor that tied all three companies was higher sales from North America. Cat’s construction business sales from North America climbed 23% in the last quarter. Deere (NYSE: DE) too chimed in with a good 23% sales growth in its construction business during its third quarter, driven primarily by an uptick in the U.S. markets. Deere derives around 20% of sales from this business, and hopes to end the year with 17% growth for the business over 2011.

Given that 50% of Manitowoc’s sales came from the North American markets last year, the importance of the market will be felt most now as strong construction activity helps offset weakness in other regions. But here’s a problem too.

Need some spice

Manitowoc isn’t getting the support from its foodservice-equipment business as it would have expected. The business accounts for more than 40% of the company’s total revenue, and thus directly affects it. Sales for the division remained flat for the first nine months of the year compared to same period last year. Only, operating earnings improved around 10%, which indicates management’s efforts to keep costs under check.

If Manitowoc manages to keep a firm grip on costs while rolling out innovative products, the business might just start looking up. Its brands have good reputation, and several products have even won accolades from food majors like McDonald’s (NYSE: MCD), which is also one of its customers.

Manitowoc’s fortunes are closely tied to the growth of restaurant chains, which haven’t been too bad this year despite global headwinds. In the first nine months, McDonald’s added 812 restaurants, and has an ambitious plan to end the year with 1,300 new ones. Likewise, Starbucks added 1,000 stores in the past twelve months with an aim to add 1,300 more next year. Interestingly, it’s not North America that is driving these companies’ desire to invest but markets like Asia Pacific that’s attracting. Starbucks’ same-store sales (stores open for 12 months or more) and revenue from China and Asia Pacific grew 10% and 23%, respectively, in this past quarter, which explains why.

The point I am trying to drive home is that as these customers grow, so will Manitowoc. In simpler terms, they are Manitowoc’s doors to high-potential growth markets, which could in turn change Manitowoc’s fortunes in times to come.

Cold hopes

Manitowoc is already betting big on developing markets. Its latest venture includes extending its popular Indigo ice machines to Latin America through a new plant to be set up in Mexico. The company’s cold business is doing better than the hot side. Further, McDonald’s, which had cut back spending on products like ice beverages and smoothies this year, is ready to get these products back on track over the next few months, which should be good news for Manitowoc.

Talking of smoothies, Manitowoc’s innovative Multiplex Blend-in-Cup workstations are ready for roll-out next quarter starting their journey with the U.K and European markets. You can get smoothies, frappes, slushies and more iced beverages from a single machine at the click of a button. Sounds good to me. Maybe ice can take some heat off Manitowoc’s mind!

I am holding off

Manitowoc needs to work really hard to buck up its foodservice business and improve financials if it wants to hit a high-growth trajectory. I think challenges overpower opportunities for now, which are likely to act as hurdles for its share price. At 22 times earnings, Manitowoc’s shares are pricey. Terex trades for 18 times earnings, while Deere and Cat are trading cheap at 11 times and 9 times earnings, respectively.

Oh, and did I tell you Manitowoc has 37 projects to work on next year to meet Tier IV emission standards? Now that certainly means additional expenses. I am holding off Manitowoc for now.

And before I leave, that one management comment was “we're not expecting great revenue bumps for 2013.” Ouch. 

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Neha Chamaria has no positions in the stocks mentioned above. The Motley Fool owns shares of McDonald's. 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.

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