How This David Beat the Goliath of the Industrials Sector


Source: Manitex

In 2013, Manitex International (NASDAQ: MNTX  ) , a manufacturer of engineered lifting equipment, delivered record financial results, growing its top line and bottom line by 19% and 26%, respectively. But Manitex is not a giant conglomerate in the industrials space like General Electric. In fact, Manitex was named in the Forbes list of America's 100 Best Small Companies for two consecutive years in 2012 and 2013. This ranking honors companies with sales below a billion dollars that have performed well on metrics such as return on equity, sales growth, earnings growth, and stock performance relative to its peers.

Manitex has also remained profitable for seven years running since 2007. Moreover, Manitex's ROE was superior to that of General Electric in 2012 and 2013. This leads to an interesting observation of industrial companies, where profitability seems to be inversely proportional to size. In the case of Manitex, its focus on niche end-markets and a high revenue contribution from replacement parts and services have been key contributing factors to its success.

Big fish in small pond
Big fishes in small ponds typically do much better than small fishes in the oceans who have to contend with the whales and sharks of the industry. In the boom truck crane market, 65% of cranes are shipped in the smaller tonnage range -- below 30 tons. But Manitex has wisely chosen to focus on the larger boom truck crane tonnage market (above 30 tons), which account for three-quarters of its shipments. This gives Manitex an edge over its competitors.

Firstly, the lower capacity boom truck segment tends to have more generic applications in areas such as general construction markets, making them more prone to demand contraction in economic downturns. In contrast, Manitex's higher capacity boom truck cranes are used specifically in the oil, gas, and power line distribution markets.

Secondly, Manitex has developed the ability to serve its customers' needs better, by focusing its energies and attention on the larger tonnage machines. For example, it had the honor of being the pioneer of the 50-ton crane in 2007. In 2012, new products introduced in the past four years since 2009 accounted for close to a quarter of Manitex's revenue, serving to validate its focused R&D efforts. 

Another industrial company which has delivered strong financial results by exploiting a niche is Gentex (NASDAQ: GNTX  ) , best known for its market-leading position in auto-dimming mirrors for vehicles. While Gentex, which generates a billion in annual sales, doesn't seem small for a niche company, this has to be viewed in the right context. The top automotive companies like General Motors and Ford deliver revenue exceeding $100 billion a year and they definitely aren't attracted to this niche market of auto-dimming mirrors. It's simply not worth their time.

Gentex appreciates the profit potential of niches and has expanded into an ancillary market, electrochromic dimmable aircraft windows. This segment has grown its revenue contribution by 56% and 62% in 2012 and 2013, respectively, suggesting room for further growth in the future.

Source: Manitex

Recurring revenue
Revenue from sales of replacement parts and after-sales services make for predictable, recurring income streams, which should be welcomed by all companies, in theory. In practice, ego gets in the way of many top executives of large companies. They prefer the prestige and excitement associated with big-ticket items (albeit low margin and low frequency of purchases) and some of them will rather leave the "crumbs" (recurring small-ticket replacement purchases) for smaller companies.

For example, signing a billion-dollar deal gets a company and its management in the news, while selling a million spare parts (costing a thousand dollars each) doesn't create the same buzz, although the monetary impact is the same.

Manitex has no such issues and doesn't let pride get in the way of profits. It supplies repair and replacement parts for all of its lifting equipment, a business which delivers higher margins than original equipment sales, representing 15%-20% of its top line. More importantly, the sales of repair and replacement parts tend to remain stable in difficult economic conditions, helping to offset the decline in original equipment sales.

Another company in the "lifting" business, Columbus McKinnon (NASDAQ: CMCO  ) , the largest manufacturer of hoists and other material-handling products in the country, also derives recurring revenue from a similar razor-and-blade business model. It sells replacement components and repair parts for its installed base of hoists, which is the largest of its peers in the U.S.

Its parts are typically priced below $5,000, suggesting low customer price sensitivity. Secondly, Columbus McKinnon has a network of about 180 hoist service and repair stations in the U.S. to ensure high maintenance and repair service quality standards.

Foolish final thoughts
When it comes to profitable industrial companies, size matters, but in a different way. One example is Manitex, which has achieved superior financial results vis-à-vis its larger peers, by virtue of its focus on niches and recurring revenue from parts and services.

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Good stocks aren't necessarily bigger, in fact, they are more likely to be smaller, like Manitex. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.


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