I was checking out McDonald’s Corporation (NYSE:MCD) earnings report while munching some salad when I realized there’s nothing to write home about. Flattish top and bottom lines…nothing interesting. But Mickey D’s lackluster earnings report almost instantly took my attention to another company that is set to report numbers next week. No, it’s not another restaurant chain, but an equipment maker that is also a supplier to McDonald’s.
Not the right recipe
Nearly 40% of Manitowoc Company, Inc. (NYSE:MTW)’s revenue comes from its food-service equipment business, so how the Big Mac and other restaurant chains fare holds tremendous significance in determining Manitowoc Company, Inc. (NYSE:MTW)’s fate. McDonald’s first-quarter revenue inched 1% higher even as comparable sales fell by the same percentage. Net income remained unchanged year over year, despite the new McRibs and McWraps and Fish McBites.
McDonald’s is one of the most important and oldest customers of Manitowoc Company, Inc. (NYSE:MTW), so any slowdown for the fast-food giant doesn’t bode well for the equipment provider. So you shouldn’t expect much from Manitowoc when it drives in with its first-quarter numbers on April 30, right?
Analysts expect…wait, what? Whoa! Analysts expect a whopping 14 times jump in Manitowoc’s first-quarter earnings per share on 6% higher revenue. Now where is that coming from? It’s certainly not its foodservice-equipment business. So are things really as strong for the construction-equipment business? The world’s largest construction-equipment maker certainly doesn’t think so.
Is the market over confident?
Caterpillar Inc. (NYSE:CAT) paints a dreary picture. Its construction industries division’s fourth-quarter sales slumped 25% year over year. Backlog value, which is a key indicator of future potential revenue, plunged 34% on weak orders. Caterpillar Inc. (NYSE:CAT) reduced inventory substantially by $2 billion during the quarter, and the worst isn’t over yet. It forecasts the first quarter to be the slowest as dealers continue to lower inventories, so much so that it could dent its revenue by $2 billion. By the time Manitowoc reports numbers, Caterpillar Inc. (NYSE:CAT) would have already given investors an idea of what to expect. Oh, not just Caterpillar Inc. (NYSE:CAT), but peer Terex Corporation (NYSE:TEX) would also have reported numbers by then.
Terex Corporation (NYSE:TEX) entered its first quarter on an unexciting note with 7% lower backlog value compared to same period last year. While backlog value for its construction segment slipped 14% in the fourth quarter, its crane division reported a 9% decline in backlog. Cranes was also the only segment to report 5% lower backlog sequentially.
So why are expectations from Manitowoc so high? I don’t think the company will be able to replicate the 10% jump in orders that it achieved in Q1 2012. Europe, a big market accounting for 20% of Manitowoc’s sales, remains painfully slow, and the North American construction market looks sluggish as well. Manitowoc’s backlog also slipped 19% in the fourth quarter. Maybe the Street’s expecting a bit too much from the company.
Things that matter
What investors should really be looking out for is how Manitowoc plans to sail through these troubled times. It has been investing more in the developing markets since some quarters, say like its new facility in Brazil, which should begin running full throttle this year. Whether or not the company’s capital outlay for 2013 also skews towards emerging markets is something investors should look for.
Manitowoc reportedly also has a number of new products lined up for this year. I’d like more details on these from its upcoming call. Another interesting area would be what opportunities Manitowoc is looking at with its recently announced joint venture with China-based Shantui. Interestingly, China has emerged as the slowest market for construction equipment in recent times. Caterpillar’s earnings call, in particular, should throw enough light on the conditions in the Chinese market, something Manitowoc investors should stay updated on.
I’d also keep an eye on Manitowoc’s moves to pare down debt this year because heavy debt load is one of the greatest concerns for the company, especially as margins remain pressured. The highest debt and lowest margins in the industry don’t impress. Manitowoc’s free cash flow is a measly $89 million for long-term debt of $1.7 billion.
The Foolish bottom line
McDonald’s doesn’t expect sales to be any better this spring, but has thankfully held on to its plans of opening 1,500 to 1,600 restaurants this year. That should keep Manitowoc’s hopes alive. Terex hinted at a weak first quarter but expects its crane segment to grow by an impressive 10% to 20% this year. So there is some good vibes from the construction side as well.
Whether Manitowoc can grow this year will depend on three factors – Europe, North American construction market, and revival of the restaurant industry. Manitowoc’s stock had an outstanding run last year, generating staggering 58% returns. The stock is up another 5% year-to-date but has given up nearly 18% gains after hitting a 52-week high in March.
Will the stock hit the peak again next week? That depends on whether or not the company can beat Street estimates. So will Manitowoc beat estimates? I was flipping through Manitowoc’s earnings surprise history, and what I found out was fun. It has alternatively beaten and missed Street estimates for the past five quarters … the last one was a beat.
The article Is the Market in Denial About This Stock? originally appeared on Fool.com and is written by Neha Chamaria.
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