Description

Investment Thesis (Long)

Manitex is a $6 stock that should generate $1 of EPS in 2012. This is not readily apparent as a confluence of factors is masking the visibility of near-term earnings growth as well as the normalized earnings power of the business. At first glance, the company appears to be fairly valued based on historical metrics, leaving share appreciation to be driven based on a cyclical recovery. However, secular and structural trends are driving earnings (regardless of a cyclical recovery) and visibility into this growth should become readily apparent in the coming weeks (through order flow and Q4 earnings commentary). All told, we expect significant fundamental improvement to drive the stock to $12+ over the next 6-12 months.

Brief Industry Overview

Manitex is an original equipment manufacturer of engineered lifting solutions, providing niche end markets with products such as boom trucks, fork lifts, and container handling equipment. The industry is mainly dominated by large manufacturers such as Terex (TEX), Manitowoc (MTW), Cargotec (Helsinki: CGCBV) and Konecranes (Helsinki: KCR1V), which compete mainly on large cranes and lifting equipment but also have smaller product lines that compete with Manitex. These businesses have proven to be highly cyclical and are under constant threat from Asian competition.

What is the Market Missing and Why Does this Opportunity Exist

Manitex is currently trading at 5.1x 2012 EBITDA (my estimate), just above the company’s 5x multiple during the prior economic crisis. The overarching theme is that the market views Manitex as a levered, micro-cap, industrial company whose prospects are driven by the uncertainty of a cyclical recovery. We point to three themes that have muddied the fundamental outlook and true earnings power of the business, contributing to a disconnect in valuation:

1. Cyclical vs. Secular: The market views Manitex as a cyclical investment thesis and historical data (which is somewhat limited and dates back to 2006) would provide ample support. We, too, believe that lifting equipment is a highly cyclical business and do not account for much of a recovery in our model. However, we believe secular trends are driving modest growth and signs point to visibility. Regardless, our expectations are modest and only assume industry demand goes from 35% to 40% of prior peak demand over the next two years.
2. Acquisitions: An acquisition spree consummated during the prior downturn has created a convoluted picture. Incremental leverage is readily apparently in current financials, but normalized earnings of the acquired businesses (which were distressed and private) remain elusive.  The acquisitions may appear modest but it is more of a testament to Management’s “vulture” investing style than their relative contribution.
3. Sell-side: two analysts launched coverage in December and consensus for 2012 EPS stands at $0.49. This puts MNTX’s valuation in the range of comps and is why the stock does not screen cheap. Consequently, many investors pass at the opportunity of doing further work, which we believe points to 2012 EPS of $1 not $0.50, providing a sizable valuation gap to comps and historicals.

Key Investment Points

For the aforementioned reasons, the market is underestimating 2012 EPS as well as the true normalized earnings power of Manitex, which we believe will approach $2 in several years.  The cornerstone to our thesis is that secular growth and structural changes (from a transformative acquisition) are driving 75% of earnings growth. Capital spending in end markets such as transmission/distribution and E&P is driving a modest industry recover and a mix towards high ton equipment will disproportionately favor MNTX.

Investment Point #1: Boom trucks may be a highly cyclical business, but secular growth will be driving near-term demand, and we have confidence that industry demand is improving from all-time historical lows. Our demand forecast makes modest assumptions, projecting industry volumes to grow from 35% to 40% of prior peak volumes over the next two years. While this translates into mid-single-digit unit growth, a mix-shift towards higher ton trucks will disproportionately benefit Manitex, driving $0.35-0.40 of incremental EPS. Should a cyclical recovery ensue, we believe this could be closer to $0.80 of EPS.

Investment Point #2: CVS Ferrari is an under-appreciated, transformative acquisition that was acquired when Manitex exercised what was essentially a free call option in July 2011. We expect structural changes to drive $0.35 of incremental EPS over the next 1-2 years.

Investment Point #3: Management has a quantifiable track record of success and significant skin in the game. The CEO was one of three founding executives of Terex (NYSE: TEX), who brought the company from bankruptcy to over $2bn in revenues. His 7.2% ownership stake has a cost basis a little below $5. Additionally, Manitex employs an acquisition strategy that can be best categorized as vulture investing and is highly underappreciated.

Company History

Competing in this industry appears daunting, given the outsized competition, lack of confidence in a cyclical recovery, and the commoditization of high ticket items. To fully appreciate Manitex’s unique positioning, a brief history lesson is required. In 1986, Terex (NYSE: TEX) was part of a German company that declared bankruptcy. The assets were purchased out of bankruptcy and three executives set on a path of building a capital goods company through acquisition:  one of the executives was Dave Langevin, who was in charge of scouring the world for acquisitions to grow Terex. The other executives were Ron DeFeo (current CEO of TEX) and Randolph Lenz (former Chairman and CEO, no longer with Terex). By the time Mr. Langevin left Terex in the late 90s, he had overseen 20+ acquisitions, revenues that were approaching $2bn, and a stock that increased 15x. He had also accumulated roughly 200,000 shares of Terex stock (all public information).

This was during the rise of the industrial conglomerate (think GE during the 90s). Despite Terex’s many successes, Mr. Langevin saw three potential threats facing these businesses: 1) larger companies had become cyclical behemoths and were too big to participate in pockets of secular growth, 2) Chinese manufacturing was commoditizing large cranes, and 3) the cost structure of an industrial conglomerate was inflexible.

Mr. Langevin saw niche opportunities where some of Terex’s successes could be repeated while avoiding some of the risks. He began to liquidate his TEX stock and partnered with a VC firm. The goal was to develop a company providing highly engineered, niche lifting solutions to end markets that were minimally cyclical and small enough not to face Asian competition, all the while maintaining a variable cost structure. In 2006, Manitex was borne.

Segment Overview

The focus of our investment thesis is on the boom truck and CVS businesses – roughly 55% of sales that will be driving 75% of growth over the next two years. The investment thesis for each business is different. For boom trucks, near-term grown is driven predominantly by secular growth trends in niche end markets. For CVS, near-term growth is driven by the restructuring of bankrupt assets.

The 10K has a good description of the products and page 12 of the investor presentation shows what the businesses look like together. **Note that there is an updated January presentation but it doesn’t include the stacked bar chart which is helpful.

http://www.manitexinternational.com/pdf/MNTX_November2011_InvestorDeck.pdf

Prior to beginning the discussion, here is a segment breakdown of revenues:

Walk Through to 2012 Earnings

Investment Point #1: Boom Trucks are Booming

Approximately 60% of growth in 2012 EPS ($0.38/share) comes from the boom truck business, and the majority of this growth is secular not cyclical. While many investors have shied away from industrial companies given the mixed data points, there are some pockets of resilience and strength within the industrial landscape –utility companies are increasing capex, US/Canadian E&P continues to be robust, and global ports remain active. While these trends are appealing, the diversification of most industrial conglomerates makes their investability difficult. Manitex’s boom truck business disproportionately benefits from this secular growth in two ways:

1. Boom trucks disproportionately serve these higher growth end markets
2. Demand is shifting towards higher ton booms and Manitex is the market leader

Boom Truck Industry Overview: A boom truck is a commercial truck chassis with a crane (aka: “boom”) that has a hook and winch mounted to it. There are three classes of boom trucks: light, medium, and heavy, which is determined by the lifting capacity (from 15 to 70 tons). MNTX is the second largest boom truck operator and competes with Terex (TEX), Manitowoc (MTW), Tadano (Tokyo: 6395), Elliott (private), and Weldco-Beales (private). The industry has proved to be highly cyclical, with total units shipped declining 76% from 2,700 in 2006 to 640 in 2010. The main drivers of industry demand are power distribution, oil and gas E&P, and new home construction.

How Is There Secular Growth in a Highly Cyclical Industry?

As evidenced by the above data, the industry is highly cyclical and we are not suggesting otherwise. It would take a significant global recovery to achieve 2,000+ units, which we are not accounting for. What we are suggesting is that the industry will get back to 1,100 units driven by secular trends and we have some visibility to support this. YTD (Q3) volumes are up 40%+, and we believe the trend continued in Q4, which translates into 920 units for 2011. The key point to note is that our expectation beyond this is somewhat modest and assumes only 8% annual unit growth. This is supported by company backlogs and capital spending plans which we detail below (also, see MNTX January 2012 press release on record backlog). All told, if our thesis is correct, the industry will still only be producing at 40% prior peak levels, leaving a broad cyclical recovery as further upside.

End Markets: Boom truck cycles are driven by power distribution, E&P, and residential construction. Despite the mixed industrial data points, capex for Utility companies and E&P companies remains robust and is forecast to grow in 2012. More importantly within Utilities, growth is driven by Transmission and Distribution, and within E&P, there is particular strength out of Canada. Both of these are Manitex’s sweet spot. We are not experts in the capex cycles of Utility and E&P companies but we have conducted numerous channel checks, which support moderate spending growth into 2012. We point to several other data points that support our industry growth thesis:

1. Manitowoc and Terex have repeatedly attributed YTD growth in revenues and backlog to boom trucks, which is quite meaningful since these are proportionally small units in the overall business (see Q2, Q3, and Q4 earnings transcripts).
2. Rental companies are reporting increased utilization from boom trucks. Essex (ticker: ESSX) reports utilization of their boom truck industry in their 10Qs, which has increased from 48% in 1Q11 to 60% in 3Q11. 
3. Citi puts out an annual T&D capex survey in December and forecasted capex growth of 11% for 2011 and 8% for 2012.
4. Bank of America put out a report in September expecting Oil industry capex to be 4% in 2012.
5. Longbow research puts out quarterly crane surveys where buyers continually point to boom trucks as an area of increased purchasing and utilization.

Two other large swing factors that we are not factoring into our growth estimates are:

1. Residential Construction: a large driver of the industry’s 75% contraction. Most management teams we have spoken with are not projecting any growth from this sector. Any recovery would add meaningful upside to Manitex’s boom truck business.
2. Replacement Cycle: boom trucks on average have a 7 year replacement cycle. Demand peaked roughly 7 years ago leaving the fleet quite aged. We expect many of these units to be retired without being replaced (since a good portion was driven by residential construction). However, we would expect a modest replacement cycle, especially from the equipment rental companies which have still not placed meaningful orders. None of this is accounted for in our estimates and would offer additional upside.

From a revenue perspective, we expect Manitex to share proportionally in the growth of these end markets (ie. maintain unit market share), achieving 8% annual unit growth from 2011-2013.  Additionally we are factoring in 3% price increases per year. Manitex began raising prices by as much as 4% in Q1 and 8% in Q2 and have already disclosed price increases for 2012, so we may be conservative here. All told, this drives roughly 70% of growth over the next two years. The remaining growth is driven by mix, as described below, which translates into $20mm and $14mm of 2012 and 2013 incremental revenue, respectively. For sensitivity purposes, every 2% increase in industry demand equates to $1mm of incremental revenues for MNTX. 

Mix-Shift: There has been a mix-shift within boom trucks towards higher ton booms. Boom trucks offer significant cost advantages over large cranes and as engineering supports higher lifting capacity, there has been a secular shift from low-ton crane purchases to high ton boom trucks.  Manitex has been the market leader in this category, especially for 40-50 ton booms, which offer much more favorable economics than purchasing/renting a crane.

Manitex does not disclose prices, margins, or mix between high-ton and low-ton boom trucks. From conversations with purchasers and with management, I estimate that high-ton booms on average have ASPs roughly 3x of low-ton boom trucks. Furthermore, of the company’s $84mm backlog, the majority is for boom trucks and it is predominantly high-tonnage. In my model, I am assuming that there is a 5-point mix shift in 2012 and 2013, which I believe is pretty conservative. Additionally, within the large boom category (30+ tons), I believe there is a further mix to the largest booms (50-ton in 2012 and the new 70-ton boom in 2013). These booms have an ASP of $500,000+, which will further drive the mix. The analysis below is based on these estimates. It is not going to be completely accurate since we do not have the exact data points. However, we do have strong conviction that we are correct from a directional standpoint and point to the significant impact on profit based on the mix-shift:

Investment Point #2: CVS Acquisition is a Game Changer

The second largest driver of near-term earnings growth, as well as longer-term normalized earnings, is the CVS Ferrari (“CVS”) acquisition, which through a bankruptcy process was initiated in July 2010 and consummated in July 2011. These assets should drive $30mm in incremental revenues between 2011-2013, adding $0.35 to EPS (100% growth) with the potential for another $0.30 down the line. The incremental gains are driven by structural changes of the bankrupt assets, not a cyclical recovery.

CVS Overview: Based near Milan, Italy, CVS manufactures lifting equipment for the global container handling equipment industry, including reach stackers and forklifts. Founded in 1973 and family owned, the company not only developed its own reach stacker but also acquired the company that invented the product (Belotti) in 2002. A services business was acquired in 2004. CVS was the third largest competitor in the reach stacker market, produced high quality products, had an installed base in the thousands and a good brand reputation with customers. Sales were averaging $100mm, margins in the mid-single digits, and employee headcount topped 300. So how did such a company end up in bankruptcy?

Brief Industry Overview: Three companies dominate the reach stacker business: Kalmar, Fantuzzi, and CVS. A global boom in port activity drove significant demand for these products over the last decade and an M&A wave ensued.

• In December 2006, Kalmar tried to buy CVS for $140mm. Kalmar, a subsidiary of Cargotec (Helsinki: CGCBV), is the largest producer with over 1bn euros in sales and mid to high single digit profitability. At the time the deal was announced, CVS was doing $120mm a year in revenue and had 305 employees. The deal was ultimately terminated for competitive reasons.
• In August 2008, Terex made an offer for Fantuzzi for $330mm. Fantuzzi had revenue of roughly $640mm in 2007. After the economy started to weaken, business slowed, Fantuzzi missed a debt payment, and Terex tried to walk. Terex could not get out of the deal and it closed for a lower price in July 2009. The acquisition has been a disaster for Terex and was expressed in detail during their May 2011 Investor Day:

“Unfortunately, when we acquired it, they had run into financial difficulties and essentially had run several of their businesses out of cash. And so, at the same time, we like product. The reality has been that many of their customers have been alienated. When you can't deliver the parts and service and products in an efficient manner, that tends to alienate your customer base. And that's basically what we ran into. Same thing with suppliers, very important suppliers had not been taken care of, essentially have not been paid. And that was something that we had to do. And over the last 18 months or so, we have been in a, basically, a repair mode, making sure that we are winning back those customers, getting their confidence back and making sure that our suppliers are going to be supportive of us going forward as we look to grow into this cycle. But in the long run, we are very optimistic about this business and the family product that we've inherited.”

CVS faced a similar fate as it bloated its cost structure during the prior boom and failed to downsize quickly (mostly because of an inflexible Italian labor force) during the recession. The family owned business was forced into Concordato Preventivo (Italian Bankruptcy). During the process, CVS began to alienate its customers as factories halted production, parts could not be delivered and suppliers could not be paid. Operators were left with aging equipment and no ability to service or replace parts.  The two logical buyers of the assets – Kalmar and Fantuzzi were essentially restricted. Kalmar for regulatory reasons and Fantuzzi for operational reasons. Liquidation was the only option until Manitex stepped in, and got a sweetheart deal.

A Free Call Option If There Ever Was One: Mr. Langevin had known the Ferrari family from his days at Terex and watched the events unfold. In July 2010, MNTX signed an agreement to rent the bankrupt assets of CVS Ferrari, which were valued at $12mm. For roughly 100,000 euros/month, MNTX received $10mm in unfilled backlog and an option to purchase the business in the following two years. No liabilities were assumed and there were only 25 employees left. The backlog essentially paid for the rental expense, providing Manitex a free call-option on the business should a turnaround in the next two years be successful. The turnaround was so successful that Manitex exercised its purchase option 1-year early in July 2011.

The Turnaround: A Path to $100mm in Revenues

CVS was generating no revenue when Manitex began renting the assets. By starting the production line and re-establishing relationships with suppliers, Manitex started booking $2mm/month in revenue in 2010. It is now doing $2.5-3mm/month ($30mm annually) and we expect it to do $5mm/month in 2013 ($60mm annually). Eventually, we think the business can do upwards of $100mm and see this this occurring in stages:

First, Manitex had to re-start the production line, convince suppliers they will get paid, provide parts for the installed base, and convince loyal customers to start placing orders. The business should do $30mm in 2011 sales. Second, Manitex needs to recapture customers. Kalmar pounced on Fantuzzi’s and CVS’s financial misfortunes by gouging customers. Since, customers simply could not rely on Fantuzzi and CVS over the last several years, Kalmar has had pricing power (and has also significant market share). Fantuzzi is still 1+ years away from becoming a competitive threat but CVS is inching away. Re-branding has included demonstrations at the industry Conexpo show in January 2011 and an on-site “dealer day” in Italy in September. OEM orders have started trickling in. In late January, CVS recorded its first North American order in the company’s history.

Third, the outlook for the industry is quite robust and for CVS in particular. Here are some data points:

• Cargotec has provided positive commentary for Kalmar. While they do not provide specific guidance for Kalmar, revenues and orders grew 20%+ in 2011. The sell-side expects Kalmar to do 15-20% top line growth with high-20s EBIT margins through 2013.
• Terex’s outlook for Fantuzzi given on its May Investor Day: “so we feel very good about the next few quarters and certainly, the 2012 in terms of what it will mean for our business.”
• Hamburg Port (CVS’s main end market) is doing very well. Container handling is up double-digits. http://www.portofhamburg.com/node/25765.
• Hamburger Hafen & Logistik (Germany: HHFA), which operates container terminals at the Hamburg Port is projecting volumes to increase 15-20% (November 11 presentation) http://www.hhla.de/fileadmin/download/HHLA_Presentation_InterimReport_9M11_E.pdf

Valuation:

I believe Manitex is conservatively worth at least $12/share on 2012 numbers and closer to $14-15/share based on comps. Simply put, earnings and growth expectations are far too low. A revision of both in the coming weeks (with Q4 earnings) and months (with order flow) should lead to an acceleration in the stock price.

For comparative purposes, the closest comps are TEX and MTW. Despite a superior growth profile and better balance sheet, Manitex trades at a 14-20% discount on consensus, and 40-60% discount on my numbers. Should Manitex trade in line (although I would argue that it should trade at a premium based on 25%+ top line growth CAGR and 100% EPS growth), its stock would be worth $14-15.

I don’t believe this is a very difficult valuation exercise. The key is conviction that EPS will be closer to $1 than $0.50 in 2012 (as consensus suggests) and could reach $2 over time. If the company ends 2012 at $0.80 or $0.90, the return is still significant, regardless if you use a 10x or 15x multiple.

Risks:

My thesis is driven by significant fundamental improvement in the business, which will lead to significant earnings growth. If you conclude from your diligence that earnings will not sharply grow in 2012, I do not think there is much upside in the stock (right now). There are several reasons why this may happen:

1. Global economic crisis: any shock to the global economy (choose your own scenario) could impact demand for boom trucks and lead customers to cancel orders.
2. European Credit:  CVS’s parts business is conducted on a cash basis but new equipment orders could require letters of credit. Should a credit crisis prevent European banks from issuing such LCs, there could be a delay in new orders.
3. Commodity Costs: Steel represents 30% of input costs and a dramatic rise in prices could cause margin (and stock) volatility. We are expecting gross margin improvement in 2012. While steel should be a small tailwind, the majority of this is due to both price increases and a positive mix shift. However, if steel prices increase dramatically, it could negate any gross margin improvement.
4. Execution: MNTX made significant cuts during the 2008-2009 downturn to streamline its cost structure. While it is not producing anywhere near prior peak levels, output is increasing at a good pace and the company will need to execute operationally in order to convert orders into profit.  

Catalyst

1. Q4 Earnings commentary and potential 2012 guidance
2. Sell-side estimate revisions
3. Orders