Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of construction-equipment maker Manitowoc (NYSE:MTW) jumped nearly 5% in morning trade today after Longbow Research upgraded its rating on the stock to buy from neutral.
So what: Analysts at Longbow Research are bullish about Manitowoc's prospects, and have a price target of $27 on the stock. That's a neat 26% upside from current share price of $21.5.
While Longbow hasn't mentioned why it is optimistic about Manitowoc, the recent uptick in construction activity in the U.S., improving margins, a growing food-service equipment business, and better operational performance compared to peers this year appear to have driven the ratings upgrade.
Since Manitowoc gets a larger chunk of revenue from the North American market, it stands to gain tremendously from the housing rebound and increased non-residential construction activity. Research and Markets projects the global crane market to grow at 7.16% clip through 2016, which bodes well for Manitowoc. The company's crane sales rose 8.5% during the nine months ended Sept. 30. Comparatively, rival Caterpillar (NYSE:CAT) reported an 11% drop in sales from its construction-equipment business during the nine-month period. Operating margin from Manitowoc's crane segment doubled year over year during those nine months.
Now what: While an improved U.S. construction market is great news for Manitowoc, crane utilization rates have softened in recent months. That's the major factor why, just last week, Goldman Sachs downgraded its rating on the stock to neutral from buy. Manitowoc also took a major blow in September when China-based Shantui ended its joint venture with the company because of unfavorable business policies in China. Since China is a high-potential market for construction-equipment companies, that's a huge setback for Manitowoc.
Manitowoc's food-service equipment business is under pressure, too -- sales remained flat and operating margin slipped 4% over the nine months through September. With major customers like McDonald's withholding expansions on weak consumer sentiments, Manitowoc will have to wait a bit more before business picks up.
Manitowoc is also deeply in the hock, with long-term debt hitting $1.7 billion as at Sept. 30, 2013. That's scary, especially if you consider that the company held only about $87 million in cash, and generated just $190 million in free cash flow over the past 12 months. At 19 times earnings, Manitowoc shares are also costlier than Caterpillar's, and yield a tiny dividend yield of 0.4% compared to Caterpillar's 2.9% yield.
With challenges galore, I'm not too sure if I'd like to listen to Longbow just yet and burn my fingers with Manitowoc stock. I'll wait for a pullback before adding the construction-equipment maker to my portfolio.
Fool contributor Neha Chamaria has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs. 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.