Description
Investment Summary
Buy Palfinger AG as a safe, long term investment in a well managed, well capitalized small cap growth company with potential for multiple expansion.
Business Description
Palfinger is an Austria based company involved in the, “manufacture lifting, loading, and handling solutions at interfaces of the transport chain.” Specifically, Palfinger manufactures truck mounted cranes and hydraulic equipment. It is the world leader in knuckle boom cranes and hookloaders. It is the number two player in timber cranes, recycling cranes, and transportable forklifts.
The table below summarizes the market capitalization of the company. All figures are in millions of Euros:
Stock price 41.32
52 week high 47.75
52 week low 24.52
Shares outstanding (millions) 9.3
Treasury shares (millions) 0.5
Shares outstanding to the market (millions) 8.8
Market capitalization (millions) 384
Debt at 12/04 38
Cash at 12/04 8
Enterprise value 413
The table before summarizes the financial results of the company going back to 1999, the year the company was listed on the Vienna Stock Exchange:
Income Statement 1999 2000 2001 2002 2003 2004
Total Revenue 245.7 332.3 337.6 299.2 335.3 425.9
Gross Profit 72.8 98.6 97.7 85.2 91.7 116.8
Depreciation 9.2 9.8 14.0 12.0 11.8 12.2
Operating Income 26.0 44.7 34.0 21.5 23.8 39.8
EBITDA 34.8 53.8 46.3 32.5 35.6 50.8
Interest Expense(4.1) (5.3) (6.1) (5.4) (4.0) (3.9)
Invest. Income 1.2 1.2 2.8 1.0 2.3 3.5
Net Interest Exp.(2.9) (4.1) (3.3) (4.5) (1.7) (0.4)
Other Non Op 0.9 1.3 1.6 1.2 1.0 0.4
EBT Ex Unusual 24.0 41.9 32.3 18.2 23.1 39.7
EBT InclUnusual 24.0 41.9 34.6 19.7 24.0 41.1
Income Tax 8.1 14.1 12.3 6.2 8.0 12.3
Minority Int. 0.8 0.0 (0.1) (0.4) (0.7) (1.5)
Net Income 16.8 27.9 22.3 13.2 15.3 27.4
Diluted EPS 2.09 3.32 2.53 1.45 1.73 3.11
Shares Out. 8.0 8.4 8.8 9.1 8.8 8.8
Divper share 0.57 1.00 0.75 0.60 0.60 1.10
On the surface, this may sound like a mediocre, cyclical, “metal bending” business. When one looks beneath the surface at Palfinger, one sees a very interesting collection of specialized, customized solutions oriented, niches run by a very competent, conservative, and value creating management team. The niches offer attractive geographical and market share growth potential. And Palfinger is the clear #1 or # 2 in all of these businesses. The return on capital employed numbers attest to this dominant position and the attractiveness of the businesses. The company had an ROCE of 16.5% in 2001. In 2002 and 2003, during a major cyclical downturn, the company’s ROCE bottomed at 10.6% for 2002, not bad for the bottom of the cycle. EBIT margin at the bottom reached a low of 7.6%. In 2004 ROCE reached 18.9%, and the 2005 order books point to another sharp increase.
Palfinger is split into two major divisions, Cranes and Hydraulic Systems. The revenue split is 70/30. Within the two major divisions there are a total of ten product subdivisions, three under the Crane Division and seven under the Hydraulic Systems Division.
The Crane Division is the cash cow, but it also offers opportunities for market share consolidation and geographical growth.
The Hydraulics Division offers the best growth area both in terms of top line and profitability. The EBIT margin in the Hydraulics Division stood at negative 2% in 2004. Over the next five year management plans to grow this margin to 12-14%. Bison, one of the subdivisions under the Hydraulic Systems umbrella, is illustrative of some of the growth opportunities within the division. It is the largest player in its specific space with EUR 350 million in revenues. It has a 10% market share. The next biggest competitor is a private company with EUR 30 million in revenues. This is illustrative of other areas, primarily within the Hydraulic Systems business, where management sees a lot of opportunity for market share growth and consolidation.
The company also splits its business geographically between Europe/Rest of World and Americas. There is also a lot of room for margins to improve in the Americas division. Margins in the Americas have gone from 1.2% in 2003 to 5.6% in 2004, but still less than half the Europe/ROW.
Management is very good. It is not promotional at all. It is conservative with in terms of guidance, financial management, and accounting. It has done a very good job of creating value and growing the business responsibly, organically and through a few selective acquisitions. The acquisition of Bison and the expansion into the Americas are illustrative of management’s ability.
The company’s five year plan calls for EUR 600 million in revenues and a blended EBIT margin of 15%. This would translate roughly into EBIT of EUR 90 million versus EUR 42 million in 2004. I would not be surprised, given their past history, if management far surpasses these targets.
Investment Thesis
The company trades at 14x 2004 eps and 10x 2005 estimated eps. Long term, I think that the earnings will continue to grow at an attractive rate, and over the time, the company will be afforded a higher multiple as investors recognize the quality of the business in terms of growth, profitability, and quality of management.
Risks
• A multiple contraction for capital goods companies.
• Low liquidity in the stock.
• Even though it is professionally run, the Palfinger family controls 65% of the shares. So far they have never really interfered negatively, in any way, with the operations or financing of the company.
• A major cyclical downturn. The stock might sell off short term, but I think that investors will be surprised by the resiliency of margins in the next trough. Management has been implementing a major rationalization program in its industrial facilities over the past few years. A lot of the operations have been moved overseas. Management believes that during the next slowdown in their business, they will be able to maintain margins above 10% versus 7% in the previous downturn in 2002. Currently, management is still seeing acceleration in its order intake.
Catalyst
Catalysts
• There is no major short term catalyst in this story. This is a moderate eps growth with multiple expansion story.
• 1Q05 earnings are going to very strong, better than expected.
• Improving profitability and growth in the Americas and in Hydraulic Systems. This is not a short term catalyst, but rather a long term catalyst that will lead to a steady re-valuation of the stock.