Monday, October 05, 2009

The Manitowoc Company (NYSE:MTW): Upgrade to Buy: See potential for 5x increase over next 3 yrs - Deutsche

Deutsche Banks is out with a major call on The Manitowoc Company (NYSE:MTW) upgrading the crane maker to Buy from Hold with a potential for 5x increase over next 3 years.

The analyst notes they upgrade Manitowoc to Buy with upside of 45% to their revised $12 target price. Although they have very little clarity on when the crane cycle will recover, the firm does not think this is the right question. They even argue that earnings have less relevance during this bottoming process since the direction of the stock is highly likely to be dictated by sentiment on the health of the balance sheet.

In this sense, they argue that the stability of the Foodservice business and benefit from working capital liquidation can generate significant levels of cash flow and therefore bridge the gap to Crane recovery. In this sense, even if earnings recover to only $2/share by 2013 (note consensus earnings expectations peaked at $4.40 in early-2008), then they think the stock is going to significantly outperform from current depressed trading levels.

Foodservice provides a key anchor through Crane downturn
With good reason, the focus for investors is on the crane cycle but with Crane revenues likely to fall from a peak of $3.8bn in 2008 to a $1-2bn trough, the reality is that the Foodservice division is likely to dominate over the next 12-24 months, accounting for an estimated 45% of revenues and 67% of EBITDA in 2010E. While the convenience restaurant and lodging segments have not been immune through this downturn, with revenues down low single-digit and margins expanding next year (due to M&A synergies and headcount reduction), Deutsche sees MTW’s Foodservice segment as a critical earnings anchor. Moreover, they believe with Emerging Market Crane demand accelerating, they do not believe Crane revenues will fall below the critical $1bn level, where the segment could start losing money.

Covenants could come into play but Deutsche sees key mitigating factors
Under recently renegotiated covenants, Deutsche projects headroom of 24% on the key Leverage covenant in 2009 but project this tightening by the end of 2010 and therefore they cannot discount the possibility of another breach. However, they see potential for $400-500m of trade w/cap to be converted into cash over the next 12- 18 months and sufficient FCF in Foodservice to meet cash interest obligations. When they then consider MTW’s quality end market positions, the firm believes that covenant relief would again be granted by the banks, unless Crane starts bleeding significant quantities of cash flow – a bear case scenario.

Corporate bond yields have declined
substantially for the majority of stocks under coverage, but the decline has been especially dramatic for MTW from a peak of 22% in August to 11% currently.

This reduction in perceived risk has been reflected in the stock’s volatility which has fallen from a high in the 180-190% range to its 12m lows in the 60-70% range in recent weeks. Again this is part of a broader trend but has been especially pronounced for Manitowoc. Note that Manitowoc’s equity volatility is still the highest in the DB Universe but Deutsche sees further scope for its volatility to decline from here.

Notablecalls: I like this one, especially in the ultra s-t:

- Deutsche Bank is calling for a 5x increase in stock price over the next 3 years. That's a gutsy call and will surely get people interested in the name.

- The stock is down over 20% from its recent peak of $10.50.

- There is the covenants issue but looking at the corporate bond yields the market seems to agree with Deutsche here. Covenants are not likely to derail the stock's advance.

- Short interest still stands at 10%. That's not huge but it's still 13M shares NOT happy about Deutsche calling for a 5x-bagger.

All in all, I think this one will trade towards $9 level today. That's 10% upside.

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