Billionaire investor Carl Icahn (Trades, Portfolio) is known for his activist campaigns. Last quarter, he bought Manitowoc's (MTW, Financial) shares with intention to force management to spin-off the company's Food Service equipment business. He also added more shares to his position in January and currently holds 10,582,660 shares of Manitowoc. The company recently agreed to his demand to split the company. Here's a look at the company's business in detail.
Business overview
The Manitowoc Company, Inc. was founded in 1902. It is a multi-industry, capital goods manufacturer operating in two principal markets: Cranes and Related Products (Crane) and Foodservice Equipment (Foodservice). The company's Crane segment is recognized as one of the world’s leading providers of engineered lifting equipment for the global construction industry, including lattice-boom cranes, tower cranes, mobile telescopic cranes and boom trucks. It accounts for ~62% of the company's top line. Manitowoc's Foodservice segment is one of the world’s leading innovators and manufacturers of commercial food-service equipment serving the ice, beverage, refrigeration, food-preparation, holding and cooking needs of restaurants, convenience stores, hotels, healthcare, and institutional applications. It accounts for ~38% of the company's revenues.
Financial overview
The following table shows revenue and profitability of the company over the last five years (Source: 10-K filing).
Manitowoc's net sales has increased from $3.07 billion in 2010 to $3.89 billion in 2014. In the same period, the company's gross profit has increased from $759 mn to $986 mn. Segment wise Foodservice equipment business has seen relatively less volatility in operating profit versus Cranes and related products business. Operating profit of Cranes and related products increased from $93.8 mn in 2010 to $218.8 mn in 2013 and then decreased to $163.9 mn in 2014. on the other hand, Foodservice equipment's operating profit increased from $201.9 mn in 2010 to $250.3 mn in 2013, and slightly decreased to $234 mn in 2014.
Investment Argument
Manitowoc has recently agreed to Carl Icahn (Trades, Portfolio)'s demand for separating its business into two different entities – one for its Cranes business and other for its food service business. Both these units cater to different end markets and have different business drivers. While Manitowoc's Crane business caters to infrastructure, commercial construction and industrial end markets, its Food Service business caters to restaurant and commercial kitchens. For Crane business Government spending on infrastructure, cyclical recovery in commercial construction and oil prices are the key drivers. On the other hand, consumer confidence and how restaurant industry is performing is important for food services business.
There is little synergy between these two businesses. So the planned separation is clearly a logical step in Manitowoc's evolution. This separation will generate value for shareholders by creating two strong industry-leading companies with distinct enterprise strategy. The two companies will be able to attract long-term shareholders that are appropriate for their business profile. Also each business will be able to optimize its capital structure and capital allocation.
However, the impending spinoff of the company's food service business is not the only positive for the company. The company is also likely to benefit from the global workforce reduction it did last quarter. The company expects that this restructuring, which primarily affected salaried office and indirect employees indirect employees in the Crane business will result in approximately $90 million cost savings in 2015.
Going forward, management expects Food Service revenue to experience mid single digit percentage growth in 2015 with operating margins improving year over year. The company's Crane Revenues are expected to decline in mid single digit percentage due to recent correction in oil prices which may affect demand from upstream oil companies. However, as discussed above, the company's restructuring measures will lead to significant cost savings and it is likely to post an increase in operating profit of Crane business despite of topline decline.
Manitowoc is currently trading at a 16.7 times FY2015 EPS. Sell-side analyst are expecting the company's EPS to grow 13% in the current year and 16% next year. I believe the stock is a good buy at current levels given its reasonable valuations and upcoming catalyst in the form of spin-off of foodservice business.
