North Wacker Drive Chicago, IL 60606
The Manitowoc Company / (MTW-NYSE) / $47.30Note to Reader: This is a new original report. All subsequent reports will have new/revised material highlighted.
FY Ends: December
Overview
The Manitowoc Company, Inc. engages in the manufacture and sale of cranes and related products, foodservice equipment, and marine in the United States and internationally. It offers engineered lift solutions and lifting equipment, as well as designs, manufactures, markets, and supports a line of crawler cranes, mobile telescopic cranes, tower cranes, and boom trucks. The company’s crane products are used in various applications, including energy, petrochemical and industrial projects, infrastructure development, such as road, bridge and airport construction, commercial and high-rise residential construction, and mining and dredging. It also designs, manufactures, and markets a range of ice making machines, walk-in and reach-in refrigerators and freezers, fountain beverage delivery systems, and other foodservice refrigeration products for the lodging, restaurant, healthcare, convenience store, soft-drink bottling, and institutional foodservice markets. In addition, the company provides construction services for commercial, government, and military vessels, including research vessels, ice breakers, ferries, patrol boats, self-unloading bulk carriers, double-hull tank barges, and articulated tug/barges. Further, it offers inspection, maintenance, and repair services for freshwater and saltwater vessels. The Manitowoc Company employs 8,000 people and is based in Manitowoc, Wisconsin. For more information about the Company, visit its website at
Analysts have identified the following issues in evaluating the investment merits of MTW:
Key Positive Arguments / Key Negative Arguments- Crane revenue growth continues to outperform expectations
- Operating margins trending higher, peak OM will likely surpass management’s target of 12%
- International segment showing accelerating growth
- Consensus estimates continue to be revised higher—outlook remains solid
- Company is re-financing to lower cost debt
- Company continues to gain market share and demonstrate pricing power
- Business is highly cyclical
- Stock valuation is much higher than historical norms (based on P/E, P/EBITDA, and P/Sales models)
- Slowing US construction could pressure results
- Input costs continue to rise
- Company’s results are susceptible to currency volatility (weak US dollar)
Analysts continue to raise revenue, earnings, and price target estimates as MTW continues to post results that are sharply higher than expectations. MTW is clearly benefiting from a dominant share position in the crane industry, where the up cycle is said to be only in the first stage, and likely to last until approximately 2008 given current estimates. Non-residential construction spending in the US and abroad along with a replacement cycle in the crane industry are buoying results.
Sales
The Company recently reported Q1’06 sales growth of 24%, well ahead of already-previously-raised guidance. Crane revenues rose 34% YoY while crane order backlog was up 85% YoY to $987MM. Breaking down revenue by segment, Cranes account for ~70% of revenues, FoodService accounts for ~20%, and Marine makes up the remaining ~10%. Management increased its forecast for Crane segment unit volume growth from the “high-teens” to “over 20%” for the remainder of FY2006. Strong price realizations (improved pricing power), market share gains in the crane industry, and extremely favorable supply/demand metrics are continuing to boost crane revenue growth rates. Management expects the current crane cycle to be more lucrative than historical cycles given the contribution from China and other emerging markets that continue to experience a robust construction boom. They expect the North American and European crane cycles to follow historical patterns. Additionally, management noted they plan to launch 14 new products in 2006, which is comparable to 2005 levels. The crane cycle in general usually lasts 10 years, with 5 up years and 5 down years. Most analysts believe MTW is operating in the early-to-mid stages of an up cycle, with peak earnings and margins likely to occur in 2008. The crane cycle normally lags the construction cycle by 1-2 years. The only negative that analysts point to in the crane segment is the apparent supply constraints (raw material shortages such as tires) which prevent the company from taking on all the contracts available to it. Analysts note that this is a relatively ‘good’ problem to have, given the current robust climate for cranes.
With regards to the smaller revenue segments, FoodService revenues are expected to rebound in Q2 following weakness in Q1. The YoY decline experienced in Q1 was attributed to 1) tough YoY comps in the beverage business as two large national accounts rolled out new stores, and 2) public knowledge of a Q2’05 labor contract expiration in the ice business which caused a pre-buy in the distribution channel (R W. Baird). Q2’06 results should benefit from easy comps. The segment’s exposure to copper and aluminum input price increases is now hedged, with management confident it can outpace any cost inflation with higher pricing. Marine segment revenue was up strongly in Q1 (+10% YoY), reflecting typical seasonality. The Marine segment has projects booked out as far as 2008 (R W. Baird). The same analyst raised their estimate for FY2006 marine sales growth from flat to 4% despite management staying with a flat YoY comp.
Management issued FY2006 revenue guidance as follows: Crane sales up 20%+, FoodService up high single-digits, and Marine flat.
($ In millions) / FY'05A / Q1'06A / Q2'06E / Q3'06E / Q4'06E / FY'06E / Est. CAGRTotal Revenue / $2,254.1 / $633.0 / $719.9 / $700.6 / $710.5 / $2,696.0 / 15.2%
YoY Growth / 24.0% / 22.1% / 24.0% / 20.6% / 19.6%
Sequential Growth / 7.4% / 13.7% / -2.7% / 1.4%
Lowest / $2,254.1 / $633.0 / $719.9 / $700.6 / $710.5 / $2,519.0
Highest / $2,254.1 / $633.0 / $719.9 / $700.6 / $710.5 / $2,805.0
Margins
The Company posted a Q1’06 operating margin of 10.7%, up 500bps YoY and well ahead of most analyst estimates. The significant YoY improvement was due to excellent crane fundamentals (demand, pricing, sales), cost controls, and leverage to higher volumes. Some analysts now believe management’s target of 12% peak operating margins is too conservative. Given that Q1 is seasonally weak, and the company was still able to post close to 11% margins on the backs of rising input cost pressures, suggests that the company’s pricing power and cost control efforts are yielding better-than-anticipated results. For FY2006, management expects crane margins to remain around 11%, while FoodService is in the mid-teens, and Marine is in the mid single-digits. Most analysts have raised their OM estimate for the crane segment for FY2006, given the much stronger-than-expected Q1’06 number, higher price realizations, favorable product mix, and benefits from shipping higher volumes. Peak operating margin estimates now range from 13-14% while some have boldly predicted the company might even surpass that mark by 2008 (the expected top of the current cycle).
FY'04A / FY'05A / FY'06E / FY'07E / Est. CAGRGross Margin / #DIV/0! / 19.1% / 22.3% / 21.9% / 30.2%
Operating Margin / 6.1% / 6.5% / 9.8% / 10.8% / 48.4%
Profit Margin / 4.3% / 3.3% / 6.1% / 6.9% / 67.8%
Earnings per Share
The company reported Q1’06 EPS of $0.47, five cents ahead of consensus. EPS outperformance came from a higher-than-expected operating margin, slightly stronger-than-forecasted crane revenues, and higher price realizations (strong pricing power). Management raised FY2006 EPS guidance to a range of $2.15-2.25 (before non-recurring items), despite a higher tax rate assumption. Most analyst estimates are much higher than the new guidance figure, as they believe management is being too conservative (operating margins in-line with Q1, slowing crane revenue growth compared to Q1’s 34%, tepid margin estimates for the other two operating segments). Analysts have also raised their “peak” earnings estimates, as they believe strong operating margins will lead to more potent earnings power than the company is letting on at this point.
For FY2006, EPS estimates range from $2.25 at (Deutsche Bank) to $2.60 at (J.P. Morgan). For FY2007, EPS estimates range from $3.09 at (Deutsche Bank) to $3.60 at (J.P. Morgan). The digest average EPS CAGR between FY’05 and FY’07 is 68.2%.
(US$) / FY'04A / FY'05A / FY'06E / FY'07E / Est. CAGREPS / #DIV/0! / $1.20 / $2.40 / $3.40 / 68.2%
YoY Growth / #DIV/0! / 100.0% / 41.6%
Low est. / $0.00 / $1.20 / $2.25 / $3.09
High est. / $0.00 / $1.20 / $2.60 / $3.60
Target Price/Valuation
Target prices for MTW stock range from $29 to $70 with an average of $56. The most common valuation method used is a 12-16X multiple applied to “peak” earnings estimates. Of the 5 brokers covering the stock, 4 have positive ratings and 1 has a negative rating.
Rating DistributionPositive / 80.00%
Neutral / 0.00%
Negative / 20.00%
Avg. Target Price / $56.00
Low TP / $29.00
High TP / $70.00
Other Discussion/Capital Structure/Cash Flow/Solvency/Governance
On May 16th, the Company announced it has completed the redemption of its 10.375% Senior Subordinated Notes due 2011. Total cash paid was 193MM euros. The company financed the repurchase using its multi-currency revolving credit facility, accounts receivable securitization facility, and cash on hand. Analysts note this move will reduce the company’s borrowing costs going forward.
Long-Term Growth
Long-term growth rates for MTW are pegged at 15%. MTW derives a large portion of its revenues from crane sales (approximately 72% of 2005 total sales). Crane fundamentals are expected to remain solid for FY2006 and beyond, with incremental growth likely coming from emerging markets (China). Strong non-residential construction, especially in Asia, coupled with a replacement cycle in the crane industry are driving strong secular trends. The crane cycle usually lasts about 10 years, with 5 up years and 5 down years. Most analysts believe the company is in the early-to-mid stages of the cycle, with peak earnings and margins expected to be achieved in 2008. Crane revenue growth will like be the key catalyst for overall growth. Crane revenues are growing around 30%, which is likely to continue until 2007. Beyond that, analysts continue to raise their expectations, now expecting crane revenue growth in the 20% range as far along as 2009 (Lehman). Management’s target for peak operating margins is 12%, however, analysts believe this to be too conservative (with estimates now as high as 13-14%). They note that the prior peak margin was 17% in 1999, however, this time around, a larger portion of revenues are derived from lower-margin crane products (as opposed to higher-margin FoodServices products), thus leading to management’s conservative outlook. Analysts believe the Company’s strong pricing power (ability to raise prices without affecting demand), disciplined cost strategy, growing market share, and its ability to expand international operations will drive the higher margins. If this thesis is correct, analysts believe earnings could rise to as high as $5 in 2008 (R W. Baird), thus suggesting significant upside in both earnings power and operating leverage from the-already strong 2006 outlook.
Individual Analyst Opinions
POSITIVE RATINGS
Deutsche Bank – Buy ($55 price target): 04/25/06 – Analyst raises the price target and remains bullish given a belief that peak earnings will not occur until 2008, suggesting a further 2-3 years of benefits from a strong up cycle. They continue to favor MTW’s earnings power and its ability to beat consensus expectations, which seemed to be raised every quarter.
J.P. Morgan – Overweight (no price target): 04/25/06 – Analyst acknowledges the shares have rallied considerably YTD (up 96%). However, they see further upside considering the likely good earnings momentum from strong crane industry fundamentals.
R W. Baird – Outperform ($70 price target): 04/27/06 – Analyst raises price target by $20/share and reiterates a bullish rating as they note they may have seriously under-estimated the Cranes segment’s profit potential (and ROIC). They believe cycle-to-cycle ROIC expansion can support higher valuation multiples, and see renewed potential for stock price appreciation.
Lehman – Overweight ($70 price target): 04/27/06 – Analyst raises price target by $10/share to reflect a higher peak earnings estimate applied to their earnings multiple. They remain bullish on the shares given a strong outlook for earnings and margins as well as continued outperformance by the company.
NEGATIVE RATINGS
Rochdale Res. – Sell ($29 price target):05/01/06 – Analyst believes the market is applying too much of a premium to MTW’s crane business. They suggest valuation is far too stretched given historical valuation. They note the market appears to be applying a near-term P/E valuation to the stock while not accounting for the cyclicality of the business and the fact that earnings and margins will likely peak sooner than most expect.
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