Manitowoc: Profit From Recovering World Economies

The Manitowoc Company is a multi-industry, capital goods manufacturer that operates in two markets: Cranes & Related Products (Crane) and Foodservice Equipment (Foodservice). See the company profile from Reuters for a more detailed summary of Manitowoc's business segments, brands, products and services.

As detailed in this Instablog, one of my strongest opinions about investing is that when to buy is just as important as what to buy. As a long-term investor, waiting to buy a stock I like when a temporary company-specific dip occurs at the same time as broad market or sector weakness has consistently proven profitable.

As noted in my prior Seeking Alpha comments, for months I've expected the best buying opportunities of the year to come around this time. So, rather than worry about a likely minor market pullback within about 6 weeks; I'll welcome a chance to buy good stocks at discounts, thereby increasing upside potential and reducing downside potential.

That turned out to be the right approach when I first bought Manitowoc (MTW) in mid-2012, and it appears a similar opportunity is developing, albeit less extreme. The stock has traded sideways with the rest of the market lately and it broke below its 50-day moving average recently. However, the mid-term and long-term story remains intact so Manitowoc still has room to run as a great play on the energy, infrastructure and other construction needs of recovering world economies.

Opportunity Highlights:

The market is overreacting to recent company-specific news.Coinciding market weakness is likely to present a buying opportunity.Forward P/E = 11.87Next 5-year annual EPS growth estimate >41%.Manitowoc 24% gross margin [ttm] is the highest in the Heavy Machinery & Vehicles industry and is growing.In Q2, Manitowoc Crane revenue grew 7.6% year over year, while competitor Terex (TEX) crane revenue grew only 3.2% and Caterpillar (CAT) construction business revenue declined 9%.Morgan Stanley notes: "We believe that Manitowoc! can add 12% and 31% upside to EPS in the event of a modest and robust non-residential construction recovery, respectively."Stifel Nicolaus rates Manitowoc a "buy" with a $25 price target.

Why is there an opportunity in Manitowoc shares?

I believe there's an opportunity brewing in Manitowoc shares due to simultaneous timing of three factors: [1] the market is overreacting to recent company-specific news, [2] due to various political concerns, the entire market is currently more likely than at any other time this year to experience weakness, and [3] Manitowoc is a volatile stock so a weak market tends to affect it more, but the dips are usually brief and such volatility presents profitable opportunities.

For an example of one way the volatility that scares some investors away can be beneficial, see section 4 of this Instablog. Regarding the tepid market, based on the majority of economic indicators, I believe we'll only get a brief and healthy pause in what remains a strong overall uptrend. As such, the coming 6 weeks or so are a time to keep a buy list ready and, in my view, Manitowoc belongs on that list.

Regarding the company-specific news that's contributing to a pause in Manitowoc shares, I don't believe it's anything to get overly concerned about. On September 16, Manitowoc announced that China's Shantui Construction Machinery terminated an agreement announced earlier this year to pursue a joint venture in China's truck crane industry. Shantui cited continual delays in obtaining the necessary approvals from the Chinese government. Manitowoc CEO Glen Tellock pointed out that, while the dissolution of the Shantui JV was indeed a setback, it did not represent Manitowoc's only option in China:

"In the meantime, we will evaluate our options with our current partner, Tai'an Taishan Heavy Industry Investment Company, with respect to the future of the Manitowoc Dong Yue business," Mr. Tellock stated.

The proposed Shantui JV would not have begun operations for at least anothe! r quarter! and, even once it kicked off, it likely would've taken at least another quarter or two to impact earnings. While the Shaunti JV would've eventually helped Manitowoc expand its footprint in China, the company's growth prospects still extend far beyond China. Manitowoc has strong positions in markets far more reliable than China such as the U.S., Europe, India and South America. And, it seems very likely that Manitowoc will just find another partner in China, as Mr. Tellock implied.

What are the business prospects for the company?

As noted above, analysts expect Manitowoc to benefit significantly from the ramp up in U.S. non-residential construction. That's a reasonable expectation since the American Energy & Infrastructure Jobs Act allocates over $250 billion to fund infrastructure projects such as roads, bridges and highways; and Manitowoc has a very strong and growing presence in all of those all areas:

Manitowoc Crane Aids In Hurricane Sandy Rebuilding Efforts

Bridging The Gap

Manitowoc is also a leader in the rough-terrain cranes that are needed in emerging markets such as South America and India, which often have to start from scratch on particularly raw land; as well as in developed markets like Europe that are much older than the U.S. and have even more degraded infrastructure. It is certainly a big positive for Manitowoc that Brazil is finally getting serious about spending on its notoriously poor infrastructure, undoubtedly to avoid embarrassment as the World Cup is hosted by Brazil next year for the first time in 50 years. The following industry-specific articles offer great insight into the breadth of Manitowoc's Crane business throughout the world:

Manitowoc All-Terrain Crane Receives European Innovation Award

Eastern Europe: Metro Deep, Mountain High

Manitowoc Grove Cranes Helping Build Brazil's World Cup Stadium

Manitowoc Celebrates Brazilian Anniversary With Expansion Plans

I haven't even discussed Manitowoc's role in the ene! rgy marke! t that's booming in the U.S. and elsewhere around the world, but we've all heard plenty about that and I'm tying to keep this article from getting too long.

What is the upside opportunity, downside risk and timeframe?

Within the next 6 weeks, I believe Manitowoc is likely to dip to my ~$18 buy price, which is slightly below its 200-day moving average. Investors should be aware that Manitowoc presents at a conference in the middle of next week since there may be comments there that could either prevent or perpetuate a dip to my buy price. Once the dip I expect occurs, I believe the shares will quickly rebound and continue rising to the ~$22 range within the following 3-6 months, which represents >22% upside from my recommended ~$18 buy price. I also believe the shares will continue on an overall uptrend thereafter and make a new 52-week high in the ~$24 range within the same 3-9 months. The ~$24 target represents >33% upside from my ~$18 buy price.

I arrived at my ~$24 target price for 3-9 months and my ~$22 target price for 3-6 months by using very conservative DCF calculations. Even though the 5-year earnings growth rate estimate is >41% (see graph below), I cut that almost in half in order to purposely make my calculations overly conservative. The result is a very conservative fair value of $24 (>33% above my ~$18 buy price). I simply took the midpoint between the $24 valuation and the current ~$20 range to arrive at a short-term 3-6 month target of ~$22.

On three separate occasions this year, the stock has shown strong support at ~$17, which represents minimal downside of ~6% from my ~$18 buy price. That doesn't mean potential downside risk has an absolute cap at that level if the market really gets hammered, but it is reassuring that the stock has repeatedly fought off that level. Manitowoc has strong institutional investor ownership of 72% so perhaps that's the level at which large holders with conviction step in to support the stock. The most risk averse investo! rs could ! obviously wait to see if the shares touch the ~$17 range again, but that potentially means missing a chance to buy altogether. I see that as unnecessary since the downside range appears narrow enough to simply continue staging in and lower the average price, if the shares do dip lower than ~$18. In other words, dips are typically short-lived with this stock, which is advantageous to investors staging into a long-term position (see section 2 of this Instablog).

Other metrics support the same value conclusions and that's not to mention what the fair value will be when the energy, infrastructure and construction rebound, both in the U.S and worldwide, continues to grow more robust, as suggested by the evidence provided under the 'business prospects' heading above. As such, I believe the real value in Manitowoc is in the long-term story. I actually wouldn't be surprised to see the shares double from current levels within a couple more years.

(click to enlarge)Source: FinViz

(click to enlarge)Source: Google Finance

What might drive realization of the opportunity?

Even at ~$19, Manitowoc is already undervalued considering the 5-year annual EPS growth estimate of over 40% and the highest margins in the industry at over 24%, among other measures. The market appears to be erroneously backing out potential earnings from a joint venture that had not even been consummated and could not have impacted earnings any time soon. I expect the shares to start moving toward more reasonable valuations as investors realize that the Shaunti JV did not affect earnings or the company's long-term prospects. The first possible prompt for that realization may be insight offered during the company's presentation at a Deutsche Bank conference next week, on ! October 2! . As the market rebounds from a brief period of weakness as political concerns subside, I expect a continuation of the overall uptrend Manitowoc shares have been on for the past couple of years to be driven by an increasingly stronger worldwide economic recovery cycle.

The business structure as another source of value.

While some may argue that Foodservice and Crane businesses under the same roof is somehow a negative, I would argue that there are actually multiple benefits to the admittedly strange pairing.

I think the unusual pairing actually offers a 'best of both worlds' type sales balance. The Crane unit provides healthy growth that's particularly attractive when world economies are cycling out of recessions and into growth stages, as they are now; while the Foodservice unit provides a practical element of stability throughout all economic cycles.

The Manitowoc website includes a brief history that touches on how the company grew in disparate directions, and also offers a subtle reminder that the company has historically been open to strategic deals. I see the fact that Manitowoc sold its Marine Group business in 2008 as a strong indicator that this is not a company that's blindly determined to stay a particular course if there ever comes a time when a better opportunity arises. Many companies are too sentimental and patently opposed to parting with businesses that helped form their history, but Manitowoc has proven wiser. This minor aspect of my overall thesis is purely speculation on a potential long-term value add, but business segment sales or spinoffs unlock value for shareholders and it's hard to argue that Manitowoc doesn't have that sort of ace card in its pocket.

Thanks for reading ... especially if you've made it this far. Feedback is appreciated as I refresh and refine my dated public writing skills.

Source: Manitowoc: Profit From Recovering World Economies

Disclosure: I am long MTW. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

Additional disclosure: I may purchase additional shares in MTW over the next 72 hours.