After Manitowoc (MTW -0.62%) stock's massive fall mid-this month, investors were eagerly hoping for the company's third-quarter earnings report to bring some respite. They were in for luck when the stock surged nearly 10% the last Tuesday of October after earnings announcement. While the stock has given up some of the gains since, it appears to be on the up move.
But what's cooking, really? There are generally four reasons why a company's earnings report may send its stock soaring: Street-crushing numbers, improved outlook, a bumper dividend or buyback announcement, or some big growth plans. Interestingly, Manitowoc's earnings didn't carry any of these.
Disappointment written all over
There was nothing special about Manitowoc's earnings report. That it confirmed its full-year guidance isn't surprising, given that the company updated its outlook just earlier this month – an event that also sent its stock crashing. Manitowoc lowered both its crane and foodservice businesses guidance, with cranes division taking a bigger hit.
What probably caught the market's attention was the surprising 38% jump in Manitowoc's third-quarter earnings – It earned $73.1 million in Q3 compared to $52.9 million last year. But those figures just tell you half the story. Manitowoc enjoyed a one-time tax benefit worth $18 million during Q3, compared to a tax expense of $17 million in the year-ago period. Striking off those special items leaves the company with 20% lower year-over-year earnings from operations (before taxes) during the third quarter. Long story short, things aren't really going right for Manitowoc.
So what's ailing the company?
Despite the optimism about the U.S. construction markets, Manitowoc's third-quarter crane sales slipped 7% year over year, hit hard by weak demand for off-road rough-terrain cranes and boom trucks, which are primarily used by refineries and petrochemical plants. Considering that the energy sector is among Manitowoc's largest crane markets, any slowdown is bound to hit the company hard. Its Q3 crane operating margin slipped to 7.3% from 9.7% in the year-ago period.
Manitowoc's foodservice business spun a more interesting story. Despite 3.8% year-over-year improvement in sales, its operating margin dropped two-and-a-half percentage points to 14.8%. Three factors drove its margins lower:
- A greater share of low-margin products in foodservice sales volumes.
- No product rollouts during the quarter. The company's strong foodservice performance during the first half of the year was largely driven by new rollouts, such as of blended beverage machine in Europe and Middle East.
- Cost overruns because of delayed restructuring at Manitowoc's facility in Cleveland, Ohio.
Foodservice division showed a lot of promise during the first half this year by generating 7% and 10% higher year-over-year revenue and operating earnings, respectively. But its tepid third-quarter performance indicates that high growth in the business may be unsustainable.
Where's Manitowoc headed?
By now, it's clear that robust residential or commercial construction markets aren't enough to put Manitowoc in the growth trajectory. The company's crane products serve diverse end markets, with power & utilities and energy ranking as the primary ones. While Manitowoc can't do much about the slowdown in end markets, it needs to take steps to counter such situations.
Thankfully, strong demand for tower and mobile cranes is boosting Manitowoc's order book – Its Q3 crane orders jumped 24% and backlog grew 26% year over year. The company also appears to be getting a good response to its next-generation patented variable position counterweight technology-driven products that were unveiled at the ConExpo 2014 held in Las Vegas earlier this year. Manitowoc even hails the technology a potential game changer for the crane industry. Top-line growth shouldn't be a problem if the company can capitalize on this innovative technology.
On its foodservice side, Manitowoc has lined up a dozen new products for launch over the next year. These new rollouts could help the company balance out some of the ongoing weakness in key markets such as the Asia-Pacific and Europe and Middle East regions.
Manitowoc has lined up new Fryer technologies for launch, targeted at international markets. Source: Manitowoc
That said, Manitowoc needs to squeeze more out of both its businesses, whether by way of pushing sales or by cutting costs. While cranes are its key to higher revenue, foodservice is a bigger profit churner for the company. The greater the growth in Manitowoc's operating earnings, the quicker it can repay its debt and free up cash to return to shareholders. Manitowoc last raised its dividends in 2010 , and currently yields a minuscule 0.4% dividend yield.
Manitowoc's Q3 numbers simply don't justify the run up in its share price. With both businesses battling headwinds, I'd wait until its end markets start showing signs of stability. Until then, Manitowoc could be under pressure.
