Investors were clearly impressed with Cascade's
For those not familiar with the company, Cascade manufactures equipment and products that are used on forklifts and other load-handling equipment. Privately held Yale Materials Handling is the largest lift-truck firm, while Toyota
Sales for the quarter advanced a modest 4%, while net income rose a more impressive 11% -- a jump attributed to higher profitability at the U.S. and China operations. Management noted some pressure on the cost side, as steel and related materials expenses continue to increase, but higher selling prices and a more favorable product mix appear to be offsetting higher commodity prices.
For the six-month period ended July 31, operating cash flow came in about 30% below reported net income, which was weaker than the prior-year period. But operating cash flow has exceeded net income for the past three fiscal years, and free cash flow has been about the same as net income. Perhaps the recent dip is indicative of an economic slowdown -- an important factor when you consider that Cascade is dependent on the overall health of the industrial side of the economy. Analysts were worried back in April that profitability and sales growth were slowing, sending the stock down from over $50 to a current $43.44. So is the stock a steal at about 13 times earnings?
As I mentioned in Cascade's last quarterly update, a low P/E for a cyclical stock usually means that the economy is strong and earnings are high. That is different for low P/E companies in other industries, where the low multiple usually signals that earnings are depressed and the price of the stock has fallen in sympathy. For a cyclical stock, the best time to buy is generally when the P/E is high, meaning that earnings are low and the economy is at or close to the trough of the business cycle.
Recessions do tend to hit Cascade; back when the economy slowed in 2000, operating margins fell to under 9%. Over the last couple of years the economy's been humming and margins have come in closer to 15%. But the company has historically been able to ride out economic fluctuations and has paid down long-term debt to under 4% of capital -- with enough cash to easily pay it off. That compares to a debt-to-capital ratio of about 40% in 2000, so the next downturn likely won't pose any liquidity concerns for Cascade.
Barring any significant environmental cleanup issues that have been highlighted in the company's 10-K, Cascade appears to be a stable if unexciting cyclical play. The stock has had a stellar run since 2000, up about 400% since then. But after today's lift, I don't think there is any significant upside potential in the stock, since the economy may indeed be slowing. However, the time to pick up shares will come after seeing how management handles the next industrial slowdown.
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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to e-mail him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.
