Manitex Showing Some Operational Improvement, But Slowing Orders Are A Sentiment Risk

Writing about Manitex (NASDAQ:MNTX) earlier this year, I thought that the company would see evidence of stronger demand in 2022, but that real leverage on that demand would likely have to wait due to cost inflation and component availability. I thought that lack of leverage could be a challenge for the stock, and the shares have been weak – falling close to 40% and underperforming other construction-leveraged names like Oshkosh (OSK) and Terex (TEX).

Looking into 2023, I’m bullish on demand from end-markets like infrastructure construction (roads, etc.) and oil/gas, but I’m less bullish on the non-residential and residential construction markets that make up close to half of Manitex’s end-market, and likewise, I’m not as bullish on the metals sector. On top of that, while I understand the reasoning of the company’s acquisition of an equipment rental business, investors don’t tend to like that kind of diversification.

Valuation doesn’t look especially demanding, but I see a risk that margin improvements and healthy deliveries in 2023 will be overshadowed by a weaker macro backdrop.

Ongoing Improvement In The Third Quarter

Industrials with significant construction equipment businesses are by and large reporting healthy financials this quarter, with Caterpillar (CAT) posting 19% revenue growth in its Construction Industries segment, Oshkosh reporting 23% growth in Access, and Terex reporting 21% overall constant-currency growth and 22% growth in the Aerial Work Platform business.

Growth is being driven by healthy demand from construction through rental equipment companies, and the companies are also benefiting from improving component availability, allowing them to deliver on their backlogs.

Manitex isn’t being left behind, posting 28% revenue growth as reported, or 22% in organic terms, with the straight boom crane business up 38%. Articulated cranes (PM Crane) had a softer quarter, but management had previously guided for that. Gross margin improved 320bp yoy and 120bp qoq to 19.0%, helping drive adjusted EBITDA up 225%, with margin more than doubling to 8%.

And Now What?

Manitex is benefitting not only from increased demand for construction equipment but also improving component supply levels that allow the company to deliver on its sizable backlog. Backlog did shrink about 3% sequentially, but still remains at a level around three quarters’ worth of revenue, and demand for PM articulated cranes, aerial work platforms, and straight boom cranes remains fairly healthy. Although management doesn’t provide explicit order information, using the company’s book-to-bill information suggests a roughly 10% year-over-year increase in orders, but a 27% sequential decline.

What comes next for Manitex, and the construction equipment sector, in general, is a big question. Many of these stocks have perked up of late, but higher rates are likely to lead to weaker construction activity in 2023 and many sell-side equipment rental/dealer surveys are showing growing pessimism about the outlook – pessimism that has often translated into weaker orders in the past.

Delivering on the backlog should drive some momentum into 2023 for Manitex, and that positive mix of moderating input costs and realized prices should help margins. Manitex hasn’t been able to be as aggressive on pricing actions as some of those larger, better-known industrials, but the company has been putting pricing actions into place, and between better-realized pricing and some modest relief on costs, I expect ongoing sequential improvement in gross margin as the company closes in on its 20% near/medium-term target.

Beyond that, though, the company is going to need to see stronger traction tied to infrastructure spending and market share gains in areas like articulated cranes.

Progress, But Not Necessarily Linear

The pandemic and the supply/production issues that followed create a big asterisk when it comes to evaluating Manitex’s performance over the last two and a half years. There’s been progress with the PM Crane, but not to the extent that investors were hoping to see – again, I refer back to the “asterisk”, as driving adoption of new equipment (articulated cranes are much more commonplace in Europe than in the American market) during the last 18 months was a big ask.

During that time, the company has taken multiple steps to refine and enhance its manufacturing and operating productivity, and has continued to see growing interest (and orders) in its Valla all-electric products. As component availability improves and manufacturing can scale up more effectively over the next year, those improvements should show in the reported results.

The bad news is that the company hasn’t been building much on its core straight-mast crane business. If anything, the company seems to have lost some share in recent years (comparing prior management presentations/comments to recent information), though not a lot.

I’m also concerned about a recent shift in strategy. Earlier this year, the company not only changed CEOs but also acquired a Texas-based equipment rental company (Rabern). Management has explained the move as one that will boost margins and cash flows, and I can understand the attraction – a simple calculation based on data in the 10-Q suggests an EBITDA margin for the Rabern business in the 30%s.

That said, investors in construction equipment companies want equipment company exposure and not rental fleet operator exposure, and I worry that the advantages of the deal (cash flow, and perhaps some improved visibility into demand trends) will be overshadowed by the added capital demands of running/supporting an equipment rental business.

The Outlook

I expected healthy second half results as the company delivers on that backlog, and third quarter results didn’t disappoint. Likewise, I expect above-trend growth in 2023 as that backlog delivery continues and the company benefits from healthy trends in markets like utilities, oil/gas, and infrastructure.

Longer term, I expect mid-single-digit revenue growth as I do expect the company to leverage opportunities in articulated cranes, O&G/steel work platforms, and electric cranes to drive growth ahead of underlying construction equipment fleet growth. I also expect margins to continue to improve, with gross margins getting back into the low-20%s and operating margin moving back into the mid-single-digits. Expanding margins beyond that will be a challenge (a “show me story”), and I’m expecting long-term FCF margins to be in the low-to-mid single-digits, consistent with most heavy equipment manufacturers over time.

The Bottom Line

I can argue that Manitex is undervalued on both a discounted cash flow and margin-based EV/EBITDA basis (looking ahead to FY’24 EBITDA and discounting back), but this is a virtually uncovered microcap in a cyclical industry heading into a period of the cycle that is likely to see weaker orders. Maybe the market has already priced in that order correction (CAT, TEX, et al. seemed to bottom earlier this fall), but investors considering these shares need to consider those macro risks as well as the ongoing risk that Manitex management won’t be able to execute on the turnaround/growth initiatives that are key to the long-term outlook.