Manitowoc Company: Carl Icahn's Next Target

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Jan 16, 2015

Manitowoc Company (MTW) has become Carl Icahn (Trades,Portfolio)'s next activist target, announcing on December 29, 2014, that he had taken a 7.77% stake in the company. Carl Icahn (Trades, Portfolio) said in his SEC filing that he believed that the firm is undervalued. He went on to say that Manitowoc should separate its two division into two separate companies to unlock value. He isn't the only activist investor to get involved. Relational Investors LLC has also disclosed an 8.52% stake in the firm and is seeking to separate the foodservice business into a separate company. With the company underperforming its peers and the market as a whole, it isn't shocking to see activist investors getting involved. Manitowoc has been operating its food service and crane divisions for over 70 years each. The last few years Manitowoc crane division has been underperforming an dragging down the company has a whole.

Manitowoc history

The company was founded a hundred years ago in Wisconsin to build and repair ships. During World War II, the company built 28 submarines for the Navy. Over time the company diversified itself into building cranes in the 1920s and commercial refrigeration after World War II. In November 2002, the company acquired the Grove Crane company for about $271 million. Manitowoc in 2008, acquired Enodis PLC, a U.K. supplier of restaurant equipments. The acquisition expanded the products that Manitowoc food and service division sales to its customers.

Manitowoc business segments overview

Crane Segment

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The company's crane segment has 31 facilities in 16 countries, and it accounted for 58% of total revenues in the third quarter of 2014. Manitowoc crane segment provides engineered lifting equipment for the global construction industry. These products include lattice-boom cranes, tower cranes, mobile telescopic cranes and boom trucks.

The company mainly markets its cranes under these brand names;

  • Manitowoc

    Manitowoc

  • Grove

    Grove

  • Potain

    Potain

  • National

    National

  • Shuttlelift

    Shuttlelift

  • Crane Care

    Crane Care

The cranes are used in a variety of applications;

  • Energy and Utilities

    Energy and Utilities

  • Petrochemicals and Industrial projects

    Petrochemicals and Industrial projects

  • Infrastructure projects

    Infrastructure projects

  • Commercial and Residential projects

    Commercial and Residential projects

During the third quarter of 2014, Manitowoc crane segment net sales were $569 million compared to $610 million the third quarter of 2013. The company reported a 6.7% decline which was caused by continued decline in rough terrain and boom truck in the North and Latin America. Manitowoc crane segment operating margins for the third quarter of 2014 were down 7.73% compared to the previous third quarter of 9. 7%. The third quarter margin were affected by decline in lower sale volume that was partially offsetted by operational efficiencies. Currently the crane segment has a backlog of $716 million, a 26% increase from the third quarter of 2013. Manitowoc crane orders of $557 million were 24% higher than the third quarter of 2013. This currently represent a book to bill order ratio of 1.0x, with most of these order being filled in the fourth quarter.

Manitowoc has said that it crane weakness is mainly caused by the weakness in the rough terrain. The whole industry for rough terrain cranes in the United States was down 27% year to date and the boom truck side was down was down 15% year to date. While the rough terrain and boom trucks are down, tower cranes have had higher demand in North America. For the full 2014 year the company expects a 5 to 9% year over year decline in crane revenues.

Manitowoc Food Service Segment

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The company market its food service equipment under a variety of brand names;

  • Manitowoc

    U.S. Range

  • Garland
  • U.S. Range

    Convotherm

  • Convotherm

    Clevland

  • Cleveland

    Lincoln

  • Lincoln

    Frymaster

  • Frymaster

    Delfied

  • Delfield

    Kysor Panel

  • Kysor Panel

    Servend

  • Servend

    Multiplex

  • Multiplex

    Kitchen Care

  • Kitchen Care

    Inducs

  • Induc
  • Koolaire

    Koolaire

Manitowoc food service segment services the top 100 restaurant chains ranging from McDonald's (MCD), Starbucks (SBUX) and Yum! Brands (YUM). Net sales for the food service segment was $417 million, up from $401 million from the third quarter of 2013. The 3.8% increase was the result of increased sales for hot side brands and ice and beverage equipment. Management's guidance from two quarters of 2014 fell short, saying that flat demand in the Asia-Pacific cause the company to fall short of its guidance. The company's food service operating earnings were $61 million lower than $69 million in the third quarter of 2013. Operating margins were 14% a 250 basis point decline compared to the third quarter of 2013. Manitowoc decline in food service operating margin were from lower demand and the company making operations more efficient.

Overall

The company's cash from continuing operations were $59 million from $116 million from the third quarter of 2013. Through Manitowoc cost-saving initiatives, the company reaped $12 million in product cost benefits. Manitowoc had $7 million less in interest expenses and $26 million in saving through the third quarter of 2014. Manitowoc continues to pay down debt to lower leverage. With company planning to reach a total debt to EBITDA of 3.5x by the end of 2014. Company maintains its strong balance sheet while trying to make prudent capital investments.

Financials

For the nine month ending in September 2014, the company revenues decreased 3% to $2.85 billion and net income decreased 10% to $123 million. Manitowoc revenues reflects a decrease in demand for the company's products and services.

Valuation

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The share price has risen since Carl Icahn (Trades, Portfolio) disclosed his position in the company on December 29, 2014. Management has made it clear that its crane operation can not operate as a separate company because of the its cyclical business. Manitowoc sells at a higher EV/EBITDA then its competitors and has a P/E ratio of 20x earnings. The company EV/EBITDA and P/E ratios are more in line with the food service peers then its construction peers. Its gross margins and operating margins are below majority of its peers. Operating earnings were $2.67 per share, with the bulk of this company from its food service segment. Currently the companies selling for little over 7.5x its operating earnings. Clearly a breakup of its divisions would reflect its crane segment a lot more than its food service segment. The crane division has about 63 cents in operating earnings while foodservice segment has $2.07 per share in operating earnings. Food service division as a separate company would sell for about $20 based on its operating earnings while its crane division, based on its operating earnings, would sell for about $6.3 per share.With Carl Icahn (Trades, Portfolio) involved in the company, the value now depends on Icahn being successful in his goal to separate its division into two separate companies. If you believe that Icahn is going to be successful in his campaign, then its shares are a buy. With Carl Icahn (Trades, Portfolio) involve the company stock becomes more of a special situation or an arbitrage with the return is based on his actions. The question you need to ask before to buy shares, is how likely is Icahn to succeed in his campaign?