Manitowoc Company, Inc. (MTW), Terex Corporation (TEX): Why This Stock’s Rally Could Be Short-Lived

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Among the few companies in the construction-equipment industry that managed to keep their heads above water this earnings season, Manitowoc Company, Inc. (NYSE:MTW) deserves special mention. The maker of cranes not only trampled Street estimates, but its earnings report also revealed some pleasant surprises.

Manitowoc’s beautiful red cranes are helping lift its profits. Image source: Manitowoc

Yet, Manitowoc Company, Inc. (NYSE:MTW) investors should not get too excited, because the company has several weak areas to work on. If Manitowoc doesn’t get its act together, its stock might start losing momentum.

A cut above the rest
Revenue from Manitowoc’s crane business climbed 8% year over year during the second quarter. Comparatively, Terex Corporation (NYSE:TEX) reported only a 3% rise in second-quarter revenue from its crane division. Caterpillar Inc. (NYSE:CAT)‘s last quarter ended on an even more bitter note, as sales from its construction industries division slipped 9% year over year.

Manitowoc Company, Inc. (NYSE:MTW)So what is Manitowoc Company, Inc. (NYSE:MTW) doing right that the others aren’t? Well, the recent uptick in construction activity in the U.S. is pushing up sales for Manitowoc cranes, even as rivals battle dwindling demand from international markets. While Manitowoc gets nearly 54% of its total revenue from the North American market, Terex Corporation (NYSE:TEX) derived only 45% of its crane division sales from the region in the most recent quarter. North America contributed only 37% to Caterpillar’s sales in 2012.

While a limited global reach is considered a weakness in today’s highly competitive environment, it seems to be working in Manitowoc’s favor, for now. Caterpillar Inc. (NYSE:CAT) was even compelled to lower its full-year guidance because of the glacial pace of growth in key markets like China.

Simply put, as long as the U.S. construction market remains robust, investors can expect Manitowoc Company, Inc. (NYSE:MTW)’s top line to rise. But what I really liked about Manitowoc’s last quarter was the improvement in its crane segment operating margin to 9.9% — a level the company hasn’t seen since 2008. While ramping up selling efforts, Manitowoc’s management also kept tight control over costs, thereby boosting margins. That’s a great sign of management efficiency.

There’s a problem here
Unfortunately, things aren’t as rosy for Manitowoc’s other business, food-service equipment. In the last quarter, the division reported a 5% drop in operating earnings on a flat top line. Yet, investors can take heart: Growth initiatives, like a new facility in Mexico and consolidation of operations in Ohio, have added to Manitowoc’s cost in recent months. The company expects these facilities to begin generating revenue by the end of this year.

Manitowoc’s fryers at work. Image source: Company website

That said, Manitowoc Company, Inc. (NYSE:MTW)’s management needs to work harder on the food-service equipment business since its growth isn’t coming easy. Revenue from the business barely improved one percentage point during the six months from January through June. Although peer Illinois Tool Works Inc. (NYSE:ITW)‘ — which gets 11% of its sales from the food-service equipment business — also reported flattish revenue from the division for the first half of the year, it still sports a decent operating margin of 17.7%. Comparatively, Manitowoc posted a 15% operating margin for the business for the six months ended June.

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