Manitowoc (MTW 0.39%) shares have done exceedingly well this year, easily outperforming peer stocks and the broader market. Plenty of factors fueled investors' optimism, including the recent pick-up in U.S. construction markets and rumors of a possible company split.
Unfortunately, the stock appears to have lost steam over the past quarter, shedding nearly 15% during the period, as of this writing. For those of you who are wondering what's going on, here are three reasons why Manitowoc stock is selling off, and why it could head even lower.
Ugly numbers
U.S. construction markets have been on a roll this year, but surprisingly, Manitowoc's numbers haven't reflected the optimism yet. Consider this: Manitowoc's crane sales fell 10% year over year during the first half this year, even as construction markets gathered steam. So what gives?
Delving deeper into the numbers, I found that demand for off-road cranes, especially rough-terrain cranes and boom trucks, has softened in recent months. Since these crane products are primarily used for energy-related projects, such as by refineries and petrochemical plants, their demand isn't directly linked to housing or commercial construction.
In fact, you'll be surprised to know that energy is one of Manitowoc's largest crane end markets, and that commercial and residential construction markets contribute just about 30% to the company's total crane revenue. Take a look.
Data source: Manitowoc Presentation at Robert W. Baird Industrial Conference, November 2013. Chart prepared by author.
That explains why Manitowoc's crane division sales haven't taken off despite a robust construction market. Since Manitowoc's business is tied to several end markets, a slowdown in any one can offset strength in another. In other words, those who are betting on Manitowoc stock encouraged by strong construction activity may end up getting disappointed later if the company's top-line growth fails to impress.
Will the momentum in foodservice continue?
Manitowoc's foodservice-equipment business, which contributed 38% to its total revenue last year, has proven to be much more profitable than cranes over the years, as evidenced below.
Data source: Manitowoc financials. Chart prepared by author.
Foodservice's strong performance this year has also played a key role in driving Manitowoc shares higher. In sharp contrast to falling crane sales, Manitowoc's foodservice division reported 4% and 7% higher year-over-year sales in the second quarter and for the first six months of the year, respectively.
But will Manitowoc's foodservice business continue to grow? Morgan Stanley raised the question this past June by highlighting how the 10% and 9% sales growth that Manitowoc registered for the business during its fourth and first quarters, respectively, could be unsustainable, given that the "cross-cycle industry growth tends to sit in the 3-5% range."
Morgan Stanley has a point: Manitowoc's foodservice sales grew only 4% year over year during the second quarter. Furthermore, despite a much stronger first half compared to 2013, Manitowoc projects its foodservice division to end the year with "mid single-digit percentage growth" in revenue and operating margin in "mid-teens percentages." That indicates a flattish year, given that the business reported 16% operating margin on 4% revenue growth last year.
Let's also not forget that Manitowoc's foodservice-equipment sales are tied closely to the health of the restaurant industry. Food-industry focused research and consulting firm Technomic projects modest growth -- at about 3% each -- for the industry for 2014 and 2015. That isn't too encouraging, especially since foodservice helps balance the volatility in Manitowoc's crane business.
Balance sheet stretched too thin
Manitowoc is heavily leveraged, thanks largely to its foodservice-equipment business. The company's debt shot up to roughly $2.9 billion after it acquired food equipment maker Enodis in 2008. Six years hence, Manitowoc still shoulders $1.7 billion in long-term debt and a total debt to equity ratio of 2.07 as of last quarter. Worse yet, the company generated free cash flow worth only $87 million over the past 12 months and currently holds only about $103 million in cash and temporary (liquid) investments.
Here's a chart showing how Manitowoc's operating income and cash flows have hardly budged over the past few years even as its debt level remains high.
MTW Operating Income (TTM) data by YCharts
That debt load not only limits Manitowoc's options to finance its growth plans through borrowing, but also appears to be one of the reasons why the company hasn't increased its dividend since 2010. Manitowoc stock currently yields a minuscule 0.3%, compared to Caterpillar's 2.8% yield.
While some may consider Manitowoc recent stock drop an opportunity, at 28 times earnings it still remains much costlier than Caterpillar, which currently trades at 17 times earnings. Manitowoc will have to work harder on its top and bottom lines to convince the market of its potential going forward, especially since it offers little for dividend-loving investors.
