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Will Manitowoc Buckle Under Pressure?

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With two polar-opposite businesses to handle, things can't be very easy for Manitowoc (NYSE: MTW  ) . Although the company has managed to beat Street estimates in the past few quarters, there are some areas where it might be losing out.

Two factors in particular seem to be big concerns and could hinder Manitowoc's future growth.

Need to look East
One drawback for Manitowoc is Europe, which is one of its biggest markets. It alone accounts for nearly 22% of the company's total sales. Clearly, with Europe struggling, low demand from the region could plague Manitowoc for a long time. What makes things tougher is its overdependence on developed markets.

Sales from North America and Europe accounted for more than 70% of Manitowoc's total sales last year. Compare this with Caterpillar (NYSE: CAT  ) , which derives 40% of its revenues from developing countries in Latin America and Asia/Pacific. To unlock the real potential of the construction business, Manitowoc needs to work hard to increase its presence in Asia, which is emerging as a hot spot for construction activity. The region contributes only 10% to the company's sales. While Caterpillar is charging ahead with new facilities and tie-ups in emerging economies such as China, Manitowoc hasn't been as aggressive in these markets. One critical reason seems to be its financial position.

Need to buck up
Heavy debt, low cash balances, and net losses sum it up. Manitowoc's total debt-to-equity ratio is at a whopping 401.2% and its interest coverage is a mere 1.4 times. For a total debt of $1.89 billion, Manitowoc's cash and equivalents is just $68.6 million, while unlevered free cash flow is at $211 million. Its operating (earnings before interest and tax) margin has been languishing at about 6%.

Because of such high leverage, there is little scope for Manitowoc to go ahead with expansion programs or return value to its shareholders. It sports a return on equity of just 4.4% and a meager 0.5% dividend yield.

The Foolish bottom line
Although Manitowoc has mentioned debt reduction and growth initiatives as its priorities for this year, we'll have to see how effectively it balances these things. Competition is tight, but opportunities are plenty. Manitowoc needs to pull up its socks to become an all-around package.

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Neha Chamaria does not own shares of any of the companies mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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  • Report this Comment On April 06, 2012, at 12:12 PM, kechal wrote:

    Several reasons your logic is flawed:

    1. The company has a better operating margin profile today than in the past cycle. Past cycle trough margins were 5.7%, this cycle is was 6.6%. Past peak margin was 11.6%. Next peak is likely to be at least 200 bps higher due to significant operational efficiency in Crane and slightly better margin in Foodservice.

    2. 55% of Foodservice revenue is derived from replacement of existing equipment that wears out and must be replaced (you can't run a restaurant with a broken freezer or oven or ice machine). In addition, of the remaining 45% of sales, the majority of non-replacement sales are driven by menu changes and existing restaurant refurbishment. Only a small portion is driven by new restaurant openings. Restaurants are spending money now after having been down for two consecutive years (a first in the past 45 years or so). Chain restaurants are projected to spend $5 billion globally on foodservice equipment from 2009 to 2015). North American and European food operator sales are projected to increase 23% to 40% from 2009 - 2015 while emerging market sales are projected to grow 70% to 150% (depending on market) over the same time frame. MTWs Foodservice segment generates mid-teens margins and is growing organically 2x - 3x faster than the overall restaurant market.

    3. Comparing MTW to CAT is not completely fair. MTWs Crane segment has significantly less exposure to the commercial and residential construction markets (only ~33%) than CAT does. Over half of Crane segment revenues are derived from industrial/petrochem/manufacturing and power generation and utilities construction. Infrastructure is another 20+%. All-in-all, 60%+ of Crane is tied to energy and infrastructure development globally. I'd also note that 60% of CATs operating profit is now derived from mining making CAT even less of a comp to MTW.

    4. The statistic you cite regarding emerging market exposure, while correct, is somewhat misleading. The Crane segment is only 40% exposed to Americas (including South America, which is really better considered emerging market). About 45% of Crane sales come from EAME(Europe, Africa, Middle East) of which Western Europe is likely only about half of that figure. Asia Pacific is about 16% of Crane segment sales. I'd also note that in your story on DE the previous day you correctly noted "Manitowoc (NYSE: MTW ) is expanding into China and building a huge crane facility in Brazil." MTW does have facilities and JVs in China but a lot of that market is dominated my domestic Chinese crane companies so none of the big three Western crane companies (MTW, TEX, Liebherr) are making significant inroads. Unlike for many other industrial companies, China is not a huge growth area for non-Chinese cranes.

    5. I'll concede the debt position of MTW is well above optimal levels. However, the maturities have been pushed out (2016 is the earliest maturity), the interest rate has been reduced and cash flows are increasing, which will allow for continued debt repayment ($150 - $200 MM per year). MTW has already reduced debt by $1 billion since it levered up to acquire Enodis. As for needing capital for M&A, that isn't really an issue given that MTW has a #1 market share in virtually every product category they sell (and those that are not #1 are #2). MTWs dividend yield is small but nobody every played MTW for yield. It's a growth story.

    6. You ignore any discussion of valuation. Look at MTW on 2012 and even more so on 2013 EV/EBITDA.

    To sum up, MTW is not a play on construction. Its growth is tied to: (1) cap spending on large infrastructure, particularly in power generation and energy. Any pickup in commercial and/or residential construction is just an added bonus. And, (2) increasing cap ex in global restaurant spending. The operating leverage as volumes in Crane improve over the next 24 months has the potential to be significant. While the Foodservice segment continues along with above market growth and some margin expansion.

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