Illinois Tool Works competes with Manitowoc primarily in the food-service equipment space, but that’s just one part of its portfolio. While Manitowoc runs two businesses, Illinois Tools Works is a mega conglomerate that makes equipment catering largely to transportation and power industries. Packaging and chemicals are some other businesses it manages. So the diversity allows Illinois Tool Works to tackle business cycle swings well, and offset weakness in one business with strength in another.
Caterpillar is digging greater benefits out of its mining business than construction; and the former has actually emerged as its face-saver and profit machine in recent times. Deere & Company (NYSE:DE) is known more for its tractors than excavators or loaders. Dominance in the resilient agriculture sector means Deere can maintain margins even when its other business, construction and forestry, faces headwinds. By now, you must have already guessed why Terex lags the group. With construction equipment as its main and sole business, Terex is the hardest hit by economic downturns.
Strangely, the two worst performers also command the highest valuations at today’s price. Markets probably see a lot of hidden potential, as evidenced by the sharp fall in their forward P/E.
| Company | Profit margin | Operating margin | Return On Equity | Trailing P/E | Forward P/E |
|---|---|---|---|---|---|
| Manitowoc | 2.6% | 7.5% | 17.8% | 25.6 | 11 |
| Caterpillar | 8.6% | 13.9% | 37.0% | 11.2 | 10.2 |
| Terex | 1.8% | 5.6% | 5.6% | 28.6 | 13.1 |
| ITW | 16.0% | 15.9% | 24.2% | 10.4 | 13.2 |
| Deere | 8.6% | 13.4% | 44.7% | 11.2 | 10 |
Source: Yahoo! Finance
But where will the growth come from for Manitowoc? On its construction side, Brazil is an opportunity as Manitowoc’s new factory rolls out rough-terrain cranes in time for World Cup 2014. The company is expanding in China as well, which is also Caterpillar’s favorite investment zone. Construction activity in the U.S. is also picking up, albeit slowly. Manitowoc’s crane orders slipped 19% in the last quarter, confirming the sluggishness. On the foodservice front, it all depends on Manitowoc’s customers. If they grow, so will Manitowoc. One of them, McDonald’s Corporation (NYSE:MCD), plans to open 1,500 to 1,600 restaurants this year. It sounds good, but the restaurant industry has too many challenges to tackle to expect boisterous growth so soon.
The Foolish bottom line
In short, Manitowoc’s story doesn’t justify its premium valuation. Its current prices and recent run up suggests expectations might have already been factored in. Europe is another serious concern. Manitowoc is trying to cut down costs, but as long as revenue and cash flows do not grow, it will be a tough game.
I’d prefer paying attention to Manitowoc’s peers right now. What about you? Shoot off your views in the Comments section below.
The article If You’re Still Chasing This Stock, Do So at Your Own Risk originally appeared on Fool.com and is written by Neha Chamaria.
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