The past few weeks have been a bit of a roller-coaster ride for Manitowoc Company, Inc. (NYSE:MTW) investors. Between mid-April and the end of the month, the stock rallied from $17 to nearly $19 when an earnings fallout sent its stock tumbling to the $17 mark again. It was just a one-day spill. The stock can kiss the $20 mark just about any time now.
Which compels me to think – were the numbers better than they appeared to be? Or are Manitowoc’s recent moves behind the market’s confidence? On both counts, Manitowoc may need a little more to sustain the momentum.
It was expected
In better stead?
Yet, despite the fact that Manitowoc missed estimates, the 5% higher revenue and an adjusted EPS of $0.09 that it reported were praise worthy given the weak demand conditions in the equipment market. Investors probably sensed this, which is why they didn’t think twice before getting their hands on the stock as soon as it slipped after earnings.
Manitowoc’s performance was also a notch above Caterpillar’s. The latter’s construction business saw revenue and net income dip 17% and 61%, respectively, this past quarter while Manitowoc’s crane segment sales improved nearly 8% year on year. While Caterpillar’s backlog value (key indicator of potential revenue) slumped 34%, Manitowoc reported 3% higher crane backlog. Had it not been for weakness in the European market, Manitowoc’s numbers would have been even better.
The real dampener
What’s really putting a damper on Manitowoc’s growth is its other business, foodservice equipment. Yet again, the business failed to deliver in the last quarter with sales rising just about 2% year on year. Big restaurant chains have slowed investments in recent months, the effects of which were bound to spillover to Manitowoc. McDonald’s Corporation (NYSE:MCD), which counts among Manitowoc’s most important customers, confirmed the weakness in consumer markets when it reported 1% fall in same-store sales and flat earnings for its first quarter. Bad news is that McDonald’s expects sales to remain sluggish in the near months. Good news is that it plans to open 1,500 to 1,600 new restaurants across the globe this year.
Manitowoc’s fortunes are closely tied to how McDonald’s and other restaurant chains expand. The greater the number of new restaurants, the better is Manitowoc’s opportunities to sell its ovens, ice machines, and other innovative products it already has in its bag or plans to launch. Presently, Manitowoc is busy realigning operations and setting up a new foodservice facility in Mexico.
Long struggle
Not much can be done about macro headwinds. My real concern is Manitowoc’s low margins and weak balance sheet. An increase in crane prices could help crane division margins but the same cannot be said for its foodservice-equipment business. For the first quarter, the business’ operating margin slipped to 14% from 14.8% a year ago.
Manitowoc’s high leverage is a bigger problem because unless operating margins improve, debt servicing will remain a task. Ironically, the foodservice-equipment business is the reason for Manitowoc’s high debt. Manitowoc added more than $2 billion debt when it outbid Illinois ToolWorks to acquire equipment maker Enodis way back in 2008. Four years hence, Manitowoc still shoulders more than $1.9 billion of long-term debt. Worse, its income and cash flows are miniscule in comparison. Take a look.
MTW Free Cash Flow TTM data by YCharts
The situation is unlikely to improve soon as Manitowoc aims to pare down just about $200 million debt this year. What really perturbs me is that the Enodis acquisition hasn’t delivered as expected. You might be surprised to know that Illinois Tool Works (NYSE:ITW) boasts better revenue growth and margins for its food-equipment business. The company has consistently maintained the business’ operating margin above 16% for past several quarters. Last year, it achieved 17.1% margin for the full year, up substantially from 15.7% in 2011. In fact, Manitowoc’s overall performance has been a stark contrast to Illinois Tool Works’ in the past five years.
MTW Net Income TTM data by YCharts
Manitowoc’s bottom line shrunk a whopping 85% during the period when Illinois Tool Works grew its net income by more than 50%. Though the latter’s bigger and diverse business portfolio helps, the question is whether Manitowoc did the right thing by diversifying into the food-equipment business. Manitowoc’s projection of mid-single digit growth in the business’ revenue for the full year isn’t inspiring either. If consumer spending doesn’t improve much, the forecast might even fall flat on its face.
The article Why You Should Hold Off on This Stock for Now originally appeared on Fool.com and is written by Neha Chamaria.
Neha is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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