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Non-Tech : Special Situations Value Investments

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From: NikhilJog	7/26/2011 8:12:07 PM
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Short Idea - MTW Potential downside from current price is USD 6 Company: Manitowoc Company (MTW). Currently trading at: USD 16 Market Capitalization: USD 2.3bn; Shares Outstanding: Approximately 131m Industry: Capital Goods, Machinery Situation: Highly leveraged post M&A situation making MTW a high beta stock Probable timeline: 6 to 12 months Main Point of Contention: Everyone on Wall Street is modeling for uptick in the Crane business and remains bullish on the company. However, numbers tell a different story. What are the catalysts for the down move? Expiration of accelerated depreciation Tax laws in Dec-2011 might lead to a further decline in Crane Segment (55% of total revenue) backlog. The uptick in Crane backlog in 1Q-11 was partly due to this tax law giving temprory uptick to the shareprice. This law expires in 6 months. High Leverage (5x Debt/EBITDA; 1x Interest coverage Ratio), will put pressure on MTW earnings due to high interest expense and high level of debt. Slowdown and increased competition in MTW's biggest Crane growth markets of China & Brazi that will lead to decline in crane segment operating margins ( Already declined from 8.2% in 1Q-09 to 2.7% in 1Q-11) New sales as opposed to renewed contracts generated 83% of Crane Revenue. Crane has 50% exposure to residential & commercial construction and road sectors. Government spend and consumer spend, main drivers for roads & construction to which Crane is 50% exposed expected to decline further. Volatile FCFE (negative in 4 of the last 9 quarters). FCFE excluding borrowing for 1Q-11 is negative USD 162m compared to negative USD77m for 1Q-10 Steady decline in Capex. Company generates cash flow just enough to cover debt expense and some more. In an event of a market downturn in addition to expiration of tax law by Dec-2011, MTW’s stock might see a significant decline. Markets that are expected to decline in 2H-2011, will have a huge negative impact on the share price. One of the historical growth strategies for MTW has been growth via acquisitions. Debt covenants due to high Leverage will discourage MTW to follow an acquisitive strategy and further hamper its growth prospects. As of 31-Mar-11, MTW’s Consolidated Senior Secured Leverage Ratio was 3.02x, while the maximum ratio dictated by its covenants under the credit facilities is 4.50x, and its Consolidated Interest Coverage Ratio was 1.94x, above the minimum ratio of 1.50x The closest competitors trade at 1.14x P/B and 0.66x P/S as opposed to MTW’s 4.3x P/B and 0.77x P/S. Potential Positive Catalyst: MTW’s Foodservice Equipment business which constitutes 45% of total revenue. It has reported steady increase in operating margins and revenues. A potential spin-off of the Crane business or separation of two segments namely Crane & Foodservices, might unlock shareholder value. However, management might not be inclined to do so.

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