Manitowoc Company, Inc. (MTW), Terex Corporation (TEX): Why This Stock’s Rally Could Be Short-Lived

How Mickey D’s can hurt Manitowoc…
Things could get even tougher moving forward, since the demand for food-service equipment is related directly to the health of the restaurant industry. Any slowdown in capital spending by restaurant chains will likely hurt Manitowoc’s business. For instance, McDonald’s Corporation (NYSE:MCD), which ranks among Manitowoc’s important customers, has trimmed its full-year capital spending forecast by $100 million.

More importantly, McDonald’s will now open 50 fewer restaurants this year as it concentrates on renovating its existing restaurants. A new look might increase customer traffic for Mickey D’s, but it will hardly make a difference in how much McDonald’s buys from Manitowoc. Worse yet, fewer new McDonald’s restaurants could mean lower sales for Manitowoc in the future.

…yet help it grow
Nevertheless, you shouldn’t underestimate the growth potential in the food-service equipment business. Consumers might be tightfisted now, but the long-term growth story remains intact. Most restaurant companies, including McDonald’s Corporation (NYSE:MCD), are investing billions of dollars in fast-growing emerging markets, which should open up a window of opportunity for Manitowoc Company, Inc. (NYSE:MTW) in the years to come. Innovative products, timely launches, and an efficient sales management team could change Manitowoc’s fortunes. Whether the company can exploit those advantages has yet to be seen.

Foolish takeaway
While a robust North American construction market can lift Manitowoc’s profits, it isn’t enough to put the company on a growth trajectory. Until its food-service equipment business picks up, Manitowoc investors might have to deal with disappointment.

More importantly, Manitowoc Company, Inc. (NYSE:MTW) has a daunting task of unloading its debt, which rose to $1.8 billion as of June 30. With free cash flow that doesn’t cover even 10% of its debt, and an interest coverage ratio of just two, I find Manitowoc’s balance sheet stretched a little too thin. That cash crunch also leaves the company little room to boost its minuscule dividend yield of 0.4%.

The article Why This Stock’s Rally Could Be Short-Lived originally appeared on Fool.com and is written by Neha Chamaria.

Fool contributor Neha Chamaria has no position in any stocks mentioned. The Motley Fool recommends Illinois Tool Works Inc. (NYSE:ITW) and McDonald’s. The Motley Fool owns shares of McDonald’s and Terex.

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