Manitowoc: A Big Lift from Global Growth
Based on our belief that the construction markets served by equipment manufacturer Manitowoc (MTW; recent stock price 45) will remain vigorous for some time to come, we think the company will continue to post solid gains in sales, profits, and free cash flow in the next few years. We think the company will be particularly helped by its recent efforts to address emerging markets.
The company's crane division, which accounts for the large majority of its revenues and profits, has been in the midst of a substantial business upturn over the past few years. Based on our belief that construction will remain robust in the fields of infrastructure and energy, the primary factors behind Manitowoc's gains of recent years, we see the company's operating performance remaining strong for an extended period.
Based on these factors, our valuation models find the shares' valuation compelling, and our recommendation is 5 STARS (strong buy).
Wisconsin-based Manitowoc is a manufacturer of cranes, food-service equipment, and marine vessels, but its crane operations have grown to represent the majority of its business. In recent years, Manitowoc has placed a strong emphasis on becoming a global company. After deriving less than 5% of its sales in international markets in 1999, foreign sales accounted for slightly more than half of Manitowoc's revenue base in 2007. The growth over that period was derived through both internal gains and acquisitions.
In 2007 the Crane unit accounted for 81% of company sales and 84% of operating profits. This segment makes tower cranes, mobile telescopic cranes, and high-capacity lattice-boom crawler cranes serving applications such as energy, petrochemical, and industrial projects; infrastructure development; commercial and high-rise residential construction; and mining and dredging.
Manitowoc's other two divisions, Foodservice and Marine, bring in a much smaller proportion of its business. In Foodservice, Manitowoc makes ice-cube machines, ice/beverage dispensers, and commercial refrigeration equipment. The Marine division provides shipbuilding, ship repair, and conversion services for government, military, and commercial customers throughout the U.S. maritime industry.
Global Insight, which provides economic, financial, and political data and forecasts, projects what we view as a particularly solid 9.2% compound annual growth rate in global construction spending for the period of 2006 to 2016. Its forecast calls for global construction spending, which we believe is the primary factor driving demand for Manitowoc's crane products, to reach $13 trillion in 2016.
In viewing nearer-term prospects for the crane industry, the Association of Equipment Manufacturers, an international trade group, expects construction equipment sales to grow 2.8% in the U.S. and 8% globally in 2008. It also forecasts that sales of lifting equipment in the next year will grow 5.2% in the U.S. and 11.9% globally.
Industry sources believe that construction spending in 2008 will be concentrated in 10 nations: Brazil, Britain, China, France, Germany, India, Japan, Spain, the U.S., and Venezuela. Most important, in our view, Manitowoc has at least one crane product line with a market share greater than 25% in all of these countries except Japan.
For several years, infrastructure improvements such as new roads and bridges, as well as high-rise commercial construction and energy projects, have created strong demand for Manitowoc products in North America and Western Europe. So the company has undertaken expansion of its three North American plants. It has also expanded and/or opened crane facilities in Italy and Portugal.
Another major source of growth lately—and in future years, in our view—has been sales to new and emerging markets. Crane sales to these markets are expected to exceed $1 billion in 2008, with strong growth likely to continue for some time to come.
The company's crane products play an important role in enabling emerging nations to get up and running. On top of that, virtually all major energy projects require lifting equipment.
Manitowoc has also strived to grow through the introduction of value-added products and services in its Crane division. The company introduced 16 new products in 2007—all aimed at making its cranes safer, faster to transport and erect, more reliable, easier to operate, and more cost-effective.
We have a positive outlook for Manitowoc's operating prospects over the next few years, based almost solely on our forecast of strength in its crane operations. We are particularly bullish about crane prospects based on the company's substantial recent-year expansion into emerging markets.
Manitowoc's crane business has traditionally experienced 10-year cycles in North America, Western Europe, and Japan, which usually includes a seven-year growth stretch. So it appears that the company will enjoy strong crane sales in those markets through at least 2010. On top of that, we expect the upswing in Manitowoc's emerging markets to continue even longer, as we believe these areas will be making infrastructure investments for quite some time. We also note that Manitowoc derives only a very small proportion of its sales base from U.S. residential markets.
We expect net sales to increase 24% in 2008, with the 29% advance we see in crane sales accounting for almost all of that rise. We think Manitowoc will benefit from strong global demand for its lifting equipment, driven by robust levels of construction projects in areas such as power plants and factories, roads, bridges, water treatment plants, other infrastructure projects, and energy projects. We also expect solid levels of growth in the U.S. and Western Europe, and even more robust gains in China, India, Eastern Europe, and the Middle East.
We see net margins widening slightly in 2008, aided by solid demand for Manitowoc's cranes, combined with the likely incremental benefits of previously implemented cost reductions. We also see profits being assisted by the company's current effort to increase production capacity through equipment and tool additions, as well as certain new plants, which should allow it to reduce its level of lower-margin production outsourcing.
Our earnings estimate for 2008 is $3.40 a share, a gain of 28% over the 2007 figure of $2.66, before one-time items. We forecast a further advance to $4.05 in 2009.
The shares recently traded at about 13 times our 2008 earnings forecast of $3.40 a share, which was at the low end of the company's range of multiples over the past decade and more in line with an end-of-cycle multiple. Because we think that the current upturn in Manitowoc's crane business will run for a few more years, we believe that a midcycle multiple in the high teens is more appropriate. Applying a multiple of about 17 times to our 2008 forecast suggests a share value of 59.
In our discounted cash flow (DCF) model, we forecast very strong free-cash-flow growth over the next two years, gains of at least 7% in the three subsequent years, with deceleration to 4% in years 16 through 20. Assuming 3% growth in perpetuity and an 11.5% weighted average cost of capital, we derive an intrinsic value of 63.
Using a blend of our relative p-e and DCF methodologies, weighted evenly, we arrive at our 12-month target price of 61.
We have a mixed view of Manitowoc's corporate governance policies. On the positive side, in our view, more than 75% of board members are outside directors, the nominating, compensation and audit committees are made up solely of outside directors, the executives and directors are subject to stock ownership guidelines, and the company has only one class of common stock.
However, we also view certain factors as negatives, particularly that Manitowoc has a poison-pill anti-takeover program. In addition, we have an unfavorable view of the company's classified board of directors, whose members are elected to terms that expire in different years (another anti-takeover measure), as well as the board's ability to amend bylaws without shareholder approval.
The primary risk to our recommendation and target price, in our view, is a downturn in the global economy. We believe this occurrence would bring a slowdown in commercial construction activity and the highly cyclical crane market. We also think that Manitowoc's growing international presence, particularly in emerging markets, subjects it to a greater degree of risk. With over 50% of sales now derived in foreign markets, Manitowoc is also subject to political and military risks, the risk of economic instability in certain regions, as well as the impact of local labor market conditions, foreign government regulations, and differences in business practices.