1 Little Company Giving Caterpillar a Run for Its Money

After Caterpillar's (NYSE: CAT  ) dour third-quarter numbers and outlook, who could have expected a construction equipment company that's a tiny fraction of Caterpillar's size to trump Street estimates and deliver solid top-line growth?

For the second-straight quarter, Manitowoc (NYSE: MTW  ) outperformed the industry leader, and its quarterly performance ranked among the best in the construction equipment space. That should compel every investor to think: What's the secret behind Manitowoc's resilience even in these difficult times? Let's figure out.

The local advantage
Manitowoc's crane sales rose 10% during the third quarter even as Caterpillar's construction equipment sales dropped 7% year over year. Thank Manitowoc's geographic mix for its higher revenue.

Manitowoc gets more than half its sales from the North American market, which is a blessing in disguise in present times when key global markets are slowing down. Caterpillar's lower Q3 revenue was largely the result of weak demand from international markets – its total machinery and power systems sales from the Asia Pacific and Latin America regions slumped 33% and 12%, respectively.

A similar trend was visible in Terex's (NYSE: TEX  ) last quarter – While strength in the North American market boosted sales of Terex's aerial works platform equipment, its crane sales slipped 12% on lower demand from Latin America and Asia. Both Caterpillar and Terex generate nearly 70% revenue each from markets outside the U.S., which explains their weak set of numbers.

So while globalization is considered the key to success in today's business world, Manitowoc is, ironically, reaping the benefits of a localized focus. Of course, it's an advantage only as long as domestic demand outpaces that of global markets.

The tall machines that are lifting Manitowoc higher
Aside from the North American advantage, Manitowoc's specialization in cranes seems to be working in its favor as well. Cranes are basic machines that are used in nearly every kind of construction activity, which in turn creates a wide market for Manitowoc.

Manitowoc cranes at work. Image Source: Company website

Caterpillar, on the other hand, is more into loaders and excavators, which find greater application in heavy industries such as mining. With the mining industry stuck in a rut, Caterpillar's equipment sales have slipped substantially in recent quarters. Terex has a more diverse portfolio, comprising the widest variety of construction equipment among the three companies, but cranes account for only 20% of its sales.

Cranes are also proving to be hugely profitable for Manitowoc. Consider this: While operating profit from Manitowoc's crane business more than doubled during the third quarter, Caterpillar reported a massive 43% fall in its construction industries business' operating earnings. More notably, Terex reported a 44% drop in third-quarter operating profit from its crane business. That shows Manitowoc's strong control over costs, indicating management efficiency. Here's how Manitowoc has fared vis-à-vis peers in recent years:

MTW Operating Margin (Quarterly) Chart

MTW Operating Margin (Quarterly) data by YCharts

As you can see, Manitowoc has not only generated better margins than Terex quarter after quarter over the past three years, but it also has been swiftly catching up with Caterpillar's margins. That's certainly a great sign for the company and investors going forward.

The Foolish bottom line
Manitowoc investors will be happy to know that a recent report by Research and Markets projects the global crane market to grow at a 7.16% clip through 2016. As a specialist in cranes, that's a great opportunity for Manitowoc. That said, it's not going to be a smooth ride for the company. Despite a good growth in revenue, Manitowoc's crane backlog and new orders slipped 22% and 23%, respectively, during the third quarter, which is certainly a concern.

More importantly, Manitowoc has a lot at stake in its other business – food-service equipment – which is battling significant headwinds. So a strong crane market is not enough to propel the company forward. Manitowoc may appear to be one of the best bets in the construction equipment industry, but challenges remain. I'll tell you more about the risks that the company faces in an upcoming post. Stay tuned.
 

Manitowoc may not make you much money, but these stocks most certainly will
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same incredible profits. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal "
The Motley Fool's 3 Stocks to Own Forever." Just click here now to uncover the three companies we love. And yes, it's a free report, but won't stay so for long! 

 
 

Read/Post Comments (2) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 06, 2013, at 6:21 PM, DAG1996MF wrote:

    Thank you for the balanced coverage. It is certainly fair and necessary to evaluate negatives to an equal degree as positives so I look forward to the next piece as well.

  • Report this Comment On November 07, 2013, at 11:03 AM, Nehams wrote:

    @DAG1996MF I'm glad you found the information useful. Thanks, and Fool on!

    -Neha

Add your comment.

DocumentId: 2714723, ~/Articles/ArticleHandler.aspx, 4/23/2014 9:24:15 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement