Manitowoc (NYSE:MTW) is a small cap to watch in the unloved and highly cyclical crane industry. The company reeling from a disappointing Q2 but does have some bright spots due to the new Presidential administration, making it an intriguing contrarian play.
In his victory speech, Donald Trump cited one of the top priorities of his administration was to rebuild the infrastructure of the nation, replacing old highways, bridges and airports to help spur job creation. This rhetoric will certainly benefit crane companies moving forward.
Manitowoc’s new management team has a highly incentivized plan, with strong ties to shareholders total return and the return of investment capital. The company has a distressed value with a low debt-to-equity ratio, which indicates a low bankruptcy risk and good upside potential. Manitowoc is appealing candidate and could see significant growth in 2017 after the struggling commodities market improves and a new infrastructure plan embarks.
Manitowoc Company is in a highly cyclical industry with repeated roller coaster-like performance over the past decade. From 2003 to 2007 its stock price soared from $4.5 to $49 per share; then crashed to $3 in 2009. After another five years, it soared again to hit $32 in 2014, and is trading around $4 again.
This time its top shareholder turned out to be Carl Icahn. Carl Icahn picked up a big stake in Manitowoc in December 2014, where he paid $146.6 M to acquire 10.5 M shares (around $14 per share), giving him a 7.7% stake in the company.
Icahn, in his usually fashion, convinced the board to break up the company into two. As an activist investor, Carl Icahn is good at turning around or selling the losing companies to the giants to unlock undervalued assets.
The crane business was trading around $4 per share with market cap of $540M. After spinning off the company, Carl Icahn received same 10M shares for both MFS and MTW. Added together, his market value of his shares on both companies ($19 per share) is considerably higher than his acquiring cost ($14 per share).
MFS is a sustainable cash generator but has limited growth potential. On the other hand MTW is a short target, EPS of ($1.01) in Q3 2016, with a short interest ratio of ~11 days to cover. With Oil prices plummeting to a distressed level, the housing marketing up in the air and deflationary pressure in agriculture, MTW customers are reducing the demand for cranes and the related services. The current fiscal year’s EPS is expected to be negative, with next year EPS improving closer to zero. Revenue was down 48% in Q2 and 20% in Q3.
MTW provides crawler cranes, tower cranes, and mobile cranes for various industries. Its main customers are oil and gas exploration, mining, infrastructure and agricultural companies. While oil gas and mining companies are experiencing deflationary pressure, the trend is starting to stabilize. It is expected that the commodity and mining industry will consolidate in the trough in 2017 and pick up strongly in 2018. The worst part is almost over for the commodity bear market, which would benefit for MTW and see a potential turnaround in the second half of 2017.
According to 2015 results, 17% of MTW revenue was contributed by infrastructure, 35% by Industrial or Petrochemical, 25% by commercial. (See Figure 2)
Source: Manitowoc Presentation
All the sources of revenue are facing headwinds, except the miscellaneous manufacturing and forestry/wood industries. (See Figure 3)
Source: CSI Markets
The company is keeping liquidity by relocating its crawler plant, consolidating the office centers and reducing employee headcount. The silver lining is in the recovery in residential/commercial construction in Western Europe.
Source: Manitowoc Presentation
No matter if MTW will continue to deteriorate or recover, one thing is for sure – Carl Icahn and the other hedge funds invested will do whatever they can to keep the shares afloat. Carl Icahn can either sell it to the big giants like Terex (NYSE:TEX) or Caterpillar (NYSE:CAT) or wait to see a turnaround result after Trump announces his infrastructure plan in 2017.
All in all, MTW future catalysts make it a strong candidate in 2017.