Description

Investing is doubly challenging: find a well run business, then buy it cheaply! Manitowoc (MTW) meets both criteria: it successfully completed an aggressive 3 year growth plan, and has new goals through 2002; as a deep cyclical, it trades near levels from mid ‘97 and October ‘98.

MTW operates in 3 arenas: Foodservice Equipment (ice machines, refrigeration units, and beverage dispensers; 47.1% of sales), Cranes (46.0%), and Marine (6.9%).

Management is guided by efficient use of capital as measured by EVA. They employ a ‘customer service’ approach...resulting in fast design to product reality, from customer input. Examples: The 999 crane, introduced 6 months ago, fits on European trucks for transport, helping to land a new customer in Holland. Just this month, MTW introduced a combination beverage and ice dispenser that meets customer requirements of access for cleaning, maintenance and sanitation. No other combination had been acceptable, and because this one uses proprietary MTW technology, no competitive response is likely any time soon. This combination is likely to be the industry standard.

Manitowoc is a cyclical, but strives to grow its businesses. Foodservice grows through new products, ‘one stop solutions’ for customers needing ice and beverages equipment, and acquisitions. Crane earnings increase from new product, improved manufacturing efficiency, and acquisitions. Marine expands through more dry dockings, more existing Great Lakes fleet modernization, and booked and potential construction projects. Acquisitions are to generate at least 50% of targeted new revenues. International sales, 11% of all revenue in 1999, are targeted for further expansion. Industry wide growth aspects include: expanding restaurant and convenience store food dispensing, age of the existing crane fleet, increased international demand, increased domestic highway construction, age of the Great Lakes marine fleet, and requirements for a double hulled petroleum fleet.

MTW remade itself in the late 90’s. From 1997 through 1999, management successfully executed a 3 year plan involving significant ‘culture’ changes...applying ‘new economy’ principles to very much an ‘old economy’ business. The result: sales rose from $500M in ‘96 to $805M in 99. By 1998, 80% of revenue was from products not offered in ‘96. In 1999, sales rose 15.9% (805M versus 695M) and net earnings grew 30% ($2.55 per share versus $1.97). For 1999, operating income was 14.8% of sales, and net was 8.3% of sales. Both margins have expanded since 1997.

With the 97-99 3 year plan complete, management announced their Vision 2000 goals for the 3 years through 2002:

1) Reach $1.3B in sales, 50/50 internal and external growth. (1999: $805.5M)

2) Generate 80% of revenues from new products and acquisitions since 1998

3) Strategic acquisitions, and global expansion key priorities

Annual benchmarks: 17% top line growth, expanding earnings faster than sales, internal growth rates double the industry average.

Third quarter of this year has been a stumbling block towards achieving these goals. Rising interest rates, unusually cold and wet weather in the prime ice machine sales season and markets, and unusually low Great Lakes water levels combined to soften all three segments’ results. An earnings warning in September accelerated a decline in the stock price. Actual earnings reported were $.50 versus the year ago $.74 The stock closed just below $18 on 10/12/00.

The conference call of 10/12/00 was relatively upbeat despite the near term turmoil. Management reiterated their 3 year goals, and indicated that with new product and efforts to control internal issues, MTW is poised to take advantage of improving market conditions. Year 2000 revenues will be about $840M and earnings around $2.35 - $2.45 per share. The strong balance sheet will permit strategic acquisitions when appropriate. Acquisitions will probably be responsible for somewhat more than 50% of the 3 year growth originally projected, and so growth will be lumpier. In the near term, Foodservice already is showing firming. Smaller crane sales remain quite soft where interest rates have the greatest impact. Large cranes' markets are positively influenced by trends in the energy and utility sectors. Marine is expecting a normal winter business level. Management also announced a 1 million share buyback, or 4% of the outstanding stock. This will be completed within 6 months. That should put a floor under the share price.

Snapshot Statistics: ROE 28.4%, ROA 11.2%, PE 7.1, PB 1.9, PS .55, Debt/Capital .39, Market Cap $442M, Dividend 1.7%

My investment projection through 2002 trims management’s goals to a rather conservative scenario. Allow 12% annual revenue increases from year 2000 to $1.054 billion by year end 2002. Hold margins to last year's 8.3%. On those assumptions, 2002 earnings are $3.65 per share on 24 million shares. A modest PE of 10 produces a stock price of $36.50.

At $18 today, $36.50 equals 103% appreciation in 2 1/4 years, excluding dividend.

Cyclicals are a timing game. MTW has had its dose of short term bad news. The stock is down, and while it may not rapidly recover, the buyback implies it will not fall a great deal further. Accumulation at these levels provides a good potential return relative to risk.

Catalyst

Superior management. Management’s 2000-2002 plan builds on the improved practices put in place in 1997-1999. Demonstrated execution supports confidence for further success.