America is making strides toward addressing its long-standing underinvestment in infrastructure and supply chains. This renewed focus on infrastructure encompasses various aspects such as roads, bridges, factories, and other critical components. One vital element in these endeavors is the utilization of cranes. As the leading player in the crane market, the Manitowoc Company (MTW) stands to benefit greatly from the increased demand for cranes. In today’s FA Alpha Daily, we’ll discuss how the market’s underestimation for The Manitowoc Company (MTW) could present a potential upside for prospective investors.
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Thursday Uniform accounting analysis
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America is at the beginning of a big Supply Chain Super Cycle.
We have been talking about it for a long time, and we are still in the early stages of it.
We just realized during the pandemic how bad our infrastructure and supply chains are. Manufacturers had problems reaching the raw materials they needed, which meant more expensive supply chains, and extended lead times.
This was not shocking considering the underinvestment in these areas in the last decade.
Now, the government and the companies are working hand in hand to solve these huge issues. A massive round of investments has already started.
Many companies announced plans to bring manufacturing facilities back home to the U.S. from different regions in Asia.
In fact, a recent study shows that 58% of global retailers and manufacturers say relocation of sources remains a high priority, while 37% of them plan to change manufacturing locations.
In the meantime, the Bipartisan Infrastructure Bill that came into effect in November 2021 continues to be a success. The U.S. is building roads and bridges and investing in public transit, rails, water infrastructure, and many more.
In its first year, the bill allowed $185 billion in funding to over 6900 projects in all 50 states.
All these projects and buildings have one thing in common. They need heavy machinery. You cannot build factories or bridges by hand…
This is where Manitowoc (MTW) comes in. It dominates the engineered lifting solutions space and is a big provider of cranes.
The company is not only present in the U.S. In fact, its sales outside of the U.S. were slightly higher than inside the U.S. last year.
Manitowoc’s performance has been lackluster recently. But it has had solid results in the past when the U.S. was more focused on infrastructure spending.
The company’s Uniform return on assets (“ROA”) has been around 4% since 2014 when the infrastructure investments lost their pace.
Its ROA has been surging since the pandemic though. It jumped from 3% in 2020 to 8% in 2022.
This is not happening by chance. The Supply Chain Super Cycle is here, and the company is on the receiving end of those investments.
As investments ramp up, it is likely that we will see this profitability rise.
This sounds like a compelling investment story. Let’s check what the market thinks about this name to understand if there is an opportunity.
We can see this through our Embedded Expectations Analysis (“EEA”) framework.
The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.
In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.
At the current share price, the market is expecting the company’s ROA to fall back to 4%, which would mean they do not benefit at all from the investments in infrastructure.
These expectations are incredibly pessimistic for a company that is the dominant provider of tools enabling infrastructure and supply chain projects.
We might see the company’s ROA surge to levels in the early 2010s as these projects develop, which would mean a big upside chance.
SUMMARY and The Manitowoc Company, Inc. Tearsheet
As the Uniform Accounting tearsheet for The Manitowoc Company, Inc. (MTW:USA) highlights, the Uniform P/E trades at 15.3x, which is below the corporate average of 18.4x but around its historical P/E of 14.4x.
Low P/Es require low EPS growth to sustain them. In the case of Manitowoc Company, the company has recently shown a 151% growth in Uniform EPS.
Wall Street analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.
We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, The Manitowoc Company’s Wall Street analyst-driven forecast is a 46% EPS shrinkage in 2023 and a 26% EPS growth in 2024.
Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Manitowoc Company’s $14.72 stock price. These are often referred to as market embedded expectations.
The company is currently being valued as if Uniform earnings were to shrink by 13% annually over the next three years. What Wall Street analysts expect for Manitowoc Company’s earnings growth is below what the current stock market valuation requires in 2023 but above its 2024 requirement.
Furthermore, the company’s earning power is 1x its long-run corporate average. Moreover, cash flows and cash on hand are below its total obligations—including debt maturities, capex maintenance, and dividends. Also, the company’s intrinsic credit risk is 540bps above the risk-free rate.
All in all, this signals high credit risk with no dividends.
Lastly, Manitowoc Company’s Uniform earnings growth is in line with its peer averages and its average peer valuations.
Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research
The Uniform Accounting insights in today’s issue are the same ones that power some of our best stock picks and macro research, which can be found in our FA Alpha Daily newsletters.