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Relational Investors calls for a Manitowoc spinoff

Part 3
Relational Investors calls for a Manitowoc spinoff (Part 3 of 8)

Why the slowing recovery could impact Manitowoc’s Crane business

Manitowoc shares

Manitowoc shares surged after hedge fund Relational Investors disclosed its position in the company and urged Manitowoc to spin off its Foodservice business. The fund’s 13D filing said, based on its communications with management and other publicly available information, “the company appears to maintain the combination of the less cyclical Food business in order to mute the inherent cyclicality of the Crane business.”

Let’s take a closer look at the Crane business’ outlook.

MTW crane revenueEnlarge Graph

We saw in the previous part of this series that demand for Manitowoc’s Crane products is cyclical. It depends on macroeconomic conditions and construction activity internationally, nationally, or regionally.

Construction spending

According to the latest data from the Commerce Department, U.S. construction spending saw a slower growth at 0.1% in May to an annual rate of $956.1 billion after rising by 0.8% in April. Severe winter weather slowed construction activity in the first quarter.

But a forecast earlier this year by the American Institute of Architects (or AIA) noted, “While Nonresidential building activity had a disappointing performance in 2013, 2014 looks to be a better year, with building activity increasing 5.8% overall, including a double-digit gain for commercial facilities. The recovery will continue into 2015, with spending increasing 8% overall and 6% for institutional buildings.”

Manitowoc’s Crane segment reported weaker results in the last two quarters. Crane sales fell around 8% in the fourth quarter of 2013 to $704.9 million and declined 14% in the first quarter of 2014 to $466.7 million. The company attributed the decline in the first quarter to lower backlog at the start of the year plus customer-related project delays.

The order backlog at the end of 2013 was lower than it was at the end of 2012. This was due to the lower order rates for new cranes experienced in the first three quarters of 2013.

But backlog was up 47% sequentially to $842 million as of March 31, 2014. Orders in the first quarter included orders that were placed at the ConExpo trade show in March. Of these orders, approximately 26% of the backlog will be delivered in 2015 or later, the company said.

Management noted, “While we do not believe the market is robust given uneven demand in some product lines and regions, we will maintain our focus on driving growth and enhancing our profitability in this segment.”

The Crane segment expects to benefit from a recovery in demand

The company said in its annual filing that its Crane segment is benefiting from a recovery in crane demand, especially within emerging markets in Asia, Latin America, the Middle East, and North America and, to a lesser extent, parts of Europe. The backlog has stabilized due to improved factory throughput efficiency and higher finished goods inventory levels in 2013. This resulted in a greater percentage of the cranes being ordered and shipped in the same quarter than in prior years, Manitowoc said in its annual SEC filing. The company believes the initiatives as to quality, reliability, and performance coupled with cost reduction measures in factory productivity and procurement, and facilities and machinery improvements from previous years, will enable it to deliver products efficiently.

The company said in its 10K, “Globally, we believe we are in the early years of a multi-year recovery and expect an increasing global demand for modern infrastructure and energy, and we are well-positioned to support these end markets anywhere in the world.”

An improvement in macroeconomic factors and construction spending could benefit Manitowoc and its peers in the construction and mining equipment space such as Terex (TEX), Columbus McKinnon (CMCO), Caterpillar (CAT), Oshkosh Corp. (OSK), and Joy Global (JOY). Terex and Caterpillar have noted an improvement in the construction industry outlook in its most recent earnings releases. Chinese crane manufacturers such as XCMG, Zoomlion (ZLIOY), Sany Heavy Industry Co., and Fushun also compete with Manitowoc in international markets.

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