The Carpenters had it completely wrong! Breaking up is easy to do. Some companies have business segments that are prefect for each other. A match made in heaven, even. Manitowoc Company, Inc. (NYSE:MTW) is not one of those companies. It is difficult to understand the logic behind having construction cranes and foodservice equipment under same corporate umbrella. The two divisions operate in different industries, sell to different customers and benefit from different economic factors. But that is precisely what Manitowoc Company, Inc. (NYSE:MTW) has done with Manitowoc Crane and Manitowoc Foodservice. These two divisions go together like peanut butter and motor oil. It just might be time for this corporate pairing to go their separate ways.
Manitowoc Company, Inc. (NYSE:MTW) is no stranger to corporate breakups. In 2009, the company sold off Manitowoc Marine, its commercial and military shipbuilding and repair division. Seemingly this would have been the perfect time to further simplify the company by spinning-off one of its remaining two divisions. But around this same time, Manitowoc Foodservice acquired the UK multinational foodservice equipment manufacturer Enodis PLC, essentially doubling down on this mismatch of a corporation.
The Manitowoc Company, Inc. (NYSE:MTW) Crane division was hit hard in 2009 thanks to the global economic slowdown. The slowdown sent the division’s operating earnings tumbling from $557 million in 2008 to a low of $91 million in 2010, with operating margins falling from 14.3% in 2008 all the way to 5% in 2011. No surprises there. When economies around the world slowdown, particularly in Europe where Manitowoc receives about 20% of its revenues, numbers like these for construction equipment companies will tend to occur.
About 65% of Manitowoc Crane’s end market revenue is derived from energy and infrastructure. Energy and infrastructure spending has seen a gradual rise globally, which is very favorable for Manitowoc’s rough terrain cranes, telescopic cranes, lattice-boom crawler cranes and others. Recently Manitowoc has instituted initiatives to better serve new regional markets, like its new facilities in Mexico and Brazil to better serve the Latin American region or its new joint venture in China for the Asia-Pacific region. Together with increased energy and infrastructure spending and these new emerging market initiatives, Manitowoc Crane is expecting to grow by high single-digits in 2013.
The Manitowoc Company, Inc. (NYSE:MTW) Foodservice division was hit nowhere near as hard during the global slowdown and their acquisition of Enodis PLC in October 2008 came at the right time. Operating earnings for the Manitowoc Foodservice jumped from $59 million in 2008 to $164 million the next year, all the way to $239 million in 2012. More importantly, thanks in part to removing a global competitor from the marketplace, operating margins increased from 10% in 2008 to 16.1% in 2012.
About two-thirds of the Manitowoc Foodservice’s revenues are from the restaurant industry. If you ever worked in a restaurant kitchen, there is a fair likelihood that you have seen many of Manitowoc Foodservice’s products. These products include grills, griddles, deep fryers, steamers, buffet counters, walk-in refrigerators, ice cream counters, soda and juice beverage dispensers, ice dispensers and beer towers (to name only a few of their product types). Essentially everything you need to operate a restaurant kitchen, Manitowoc Foodservice sells. The company also makes and sells products to grocery stores, school and hospital cafeterias and to the travel industry with products such as those hotel ice dispensers you see on ever floor of every hotel.
Manitowoc Company, Inc. (NYSE:MTW) Foodservice has and will continue to benefit from the growing emerging-market middle-class around the world. As multinational and regional restaurant chains expand their footprint into Asia, Latin America, Africa and the Middle East, Manitowoc expands along with them. The growth of companies like McDonald’s Corporation (NYSE:MCD) into Brazil or Yum! Brands, Inc. (NYSE:YUM) KFC into China is in turn growth for Manitowoc Foodservice.
The Conglomerate Discount
Aside from the two divisions having absolutely nothing to do with each other, there are good reasons why Manitowoc Crane and Manitowoc Foodservice would greatly benefit from going their separate ways.
Companies with one or more disparate businesses segments often are valued at what is known as a “conglomerate discount”. The more complicated a company, the less willing investors are to give that company a higher valuation. An investor wishing to invest in heavy machinery may not want to have anything to do with foodservice equipment (and vice versa). For companies like Manitowoc, the whole of the company can sometimes be worth significantly less than the individual parts. If we take a look at some of Manitowoc’s direct competitors, this becomes clearer.