“I would guess we're going to see more Chinese investment in the United States in all kinds of things… But it wouldn't surprise me to see some of that, yeah. I expect that's probably a strategy. If I were sitting over there in China, I'd be looking at some of this also.”
- CAT CEO Doug Oberhelman on Zoomlion TEX 1/28/2016
Takeaway: As we see it, MTW offers favorable idiosyncratic exposure in a deteriorating macroeconomic environment, with the less cyclical Foodservice equipment unit dominating the value picture. The Street’s approach to the Crane segment is inconsistent, as the fixation on the unit’s cyclicality stops at valuation. While we plan to keep our view on a short leash in anticipation of a weakening operating environment, the new management team performed extremely well on today’s call and looks to be executing well.
Overview
We will let others summarize the quarter, and really only want to highlight a few items. Our key work on MTW is in our December Black Book and Model/EQM – ping us if you would find them helpful.
- Executing On Operating Improvements: For the second quarter, we have seen much better operational execution and expect this to continue. Operational improvement is a key part of our thesis.
- New Management, Street Disbelief: The new management team is executing well, and is certainly an improvement on the prior [insert expletive]. They pushed back convincingly against a negative analyst community on the earnings call (not one “Hey, nice quarter guys!”).
- Street Can’t Have It Both Ways: Cranes can’t be too cyclical for debt, but also valued on a multiple of earnings or EBITDA. Further, MIDD used to be a bad comp because it had higher margins; now that its shares have declined, it is often referenced as an acceptable comp that is not highly valued enough.
Cranes Segment Is Cyclically Depressed: It is odd how analysts bemoan the Crane business as too cyclical for debt, but fail to treat the business as cyclical for valuation purposes. Cyclicals look expensive near a trough, and cheap near a peak. It is a real challenge and a real alpha opportunity. An investor that uses a multiple of an income metric to invest in cyclicals will bias toward purchasing value traps and passing on real value. Crane segment margins are already below GFC levels on a TTM basis. Part of that is mismanagement, but crane demand also tanked last year as used resource-related cranes displaced new sales. Note that Crane segment margins did fine during the strong dollar period of the 1990s, to the extent comparable.
Crane Valuation: We would instead choose a sales based multiple for the Crane segment. Historically, TEX and Tadano have both traded between 0.5 and 1.5 EV to sales. The Zoomlion bid for TEX comes out to roughly 0.71. If one uses that bid as reference point the Crane segment would be worth ~$1.3 billion. We can take it out, say, $200 million in separation and other one-time costs and still be left with a Crane EV of $1.1 billion. There is significant room for operating improvements, too.
Foodservice Availability Bias: Shares of MIDD have sold-off, which has reduced the valuation on the most ‘available’ comparison. Comparable transactions, like Marmon’s buy of IMI’s beverage segment, haven’t changed; shares of Rational AG, a European comp, have increased. We still think its worth as much or more than MTW’s current EV, say, >$3.5 billion.
Upshot: As we see it, MTW offers favorable idiosyncratic exposure in a deteriorating macroeconomic environment, with the less cyclical Foodservice equipment unit dominating the value picture. The Street’s approach to the Crane segment is inconsistent, as the fixation on the unit’s cyclicality stops at valuation. While we plan to keep our view on a short leash in anticipation of a weakening operating environment, the new management team performed extremely well on today’s call and looks to be executing well.
