urfinguss/iStock via Getty Images

urfinguss/iStock via Getty Images

All things considered, Manitex’s (MNTX) performance over the past year has been pretty good. This small heavy machinery manufacturer certainly hasn’t been immune to the wider supply chain challenges hitting the sector, but these shares are basically flat since my last article, outperforming a host of heavy machinery comps like Caterpillar (CAT), CNH Industrial (CNHI), Deere (DE), Manitowoc (MTW), Oshkosh (OSK), and Terex (TEX), though underperforming the S&P 500 and Russell 3000.

The weakness across the sector is interesting, with equipment inventories (new and used) running low and likely demand acceleration in the coming years on renewed construction activity and the longer-term benefits of the infrastructure bill. Manitex still has a lot to prove, but management seems to have the company on a better path where strategy and operational execution are concerned, and I think this is still a name worth watching.

Manitex’s business is driven significantly by construction of one kind or another, with residential, non-residential, and infrastructure collectively amounting to around two-thirds of normalized revenue.

Construction activity has been weak of late, but that’s as I expected given the weak starts during the uncertainties of the pandemic. While there’s strong activity today in industrial and warehouse non-resi construction, I expect to see improving activity toward the end of 2022 and into 2023. Meanwhile, residential construction numbers won’t look as impressive given tougher comps, but underlying activity is still robust, and I expect to remain so through at least 2023.

Infrastructure should be a meaningful driver, but not right away. Right now, infrastructure isn’t a particularly strong market as states and municipalities are still recovering from the chaos (budgetary and logistical) created by the pandemic. With the infrastructure bill passed, though, I think there should be meaningful improvements in 2023 and beyond across relevant-to-Manitex categories like roads, bridges, water, airports, ports, and utilities.

Speaking of utilities, this is another meaningful market and one that, based on commentary from companies like Hubbell (HUBB) still seems to be in decent shape, as utilities invest in grid hardening.

Although orders at Manitex declined 39% qoq in the third quarter, they were still up 25% year over year, and I would expect to see strong orders in the fourth quarter, as well as meaningful growth in the backlog that should have the company going into 2022 with more than two quarters of revenue in the backlog.

Like other industrials, Manitex started seeing supply chain issues cropping up in the third quarter, leading not only to noticeably weaker gross margins, but also challenges in sourcing enough components (chassis, hydraulics, et al) to meet orders.

I don’t expect this situation to improve much until the second half of the year (2022). Management has been taking pricing actions (on the order of 10%, I believe), but real margin leverage is likely a second-half driver. In the meantime, I’m certainly interested in what management has to say about their ability to meet demand with respect to sourcing needed components – most industrial companies are going all-out to meet demand, but everyone is dealing with issues relating to labor and components (meaning the components Manitex needs are compromised by a lack of components for those components).

It’s likely not going to show up in the financials until 2023, at the earliest, but I do believe management continues to execute on its operational improvement plan. The latest example is an announcement back in December that the company would be closing an underutilized plant in Minnesota that primarily manufactured Badger rough-terrain cranes and moving that production to an existing facility in Texas. While there will be some short-term costs to the move (mostly non-cash), this should still boost margins in the future.

Longer-term, I also still like the stories around Manitex’s knuckle-boom cranes and electric machinery. I’ve talked about the knuckle-boom opportunity in prior articles, but the gist of the story is that this is an equipment category that’s meaningfully underutilized in North America (relative to Europe). Knuckle-booms aren’t the right machine for every job, but in areas where space is restricted (factories, utilities, residential areas) and/or there is a need to place heavier loads with more exacting precision, they’re an under-appreciated tool.

I’m also bullish on Manitex’s early leverage to electrification through its Valla electric crane offerings, and revenue was up 70% in the third quarter for this small business. While Manitex doesn’t have the resources to be an electrification story in the way that PACCAR (PCAR) or Komatsu (OTCPK:KMTUY) could be, offering electrified options to a market increasingly attentive of ESG concerns is still important in my view.

The crux of the bullish Manitex story is namely this – that healthy residential construction will continue, that commercial construction will recover in late 2022/2023, and that the infrastructure bill will drive a multiyear improvement in equipment demand, magnified by low current inventories in the dealer chain, and that Manitex will leverage that volume growth opportunity across an improved and more efficient cost and capital structure.

To those ends, I’m looking for revenue acceleration in 2022 and beyond, driving long-term core revenue growth of around 5%, and for gross margin to move above 20% in 2023, something the company hasn’t done since 2015. I’m likewise expecting solid operating leverage, with 5% revenue growth from 2019-2024 (annualized) but only around 2% operating expense growth. A further boost to free cash flow should come from more efficient working capital management.

I don’t think these are heroic assumptions, and on a discounted cash flow basis, they support an annualized return in the high-single-digits today and a prospective near-term return comfortably in the double-digits. My margin/return-based EV/EBITDA approach isn’t quite as compelling, although still in the double-digits with a 10x multiple, but some of that comes from the need to look beyond the next two years to more of a “run rate” EBITDA and then discount back.

The self-improvement story at Manitex isn’t new anymore, but I think the lack of obvious progress has more to do with the challenges created by the pandemic than execution issues, and I think if you dig a little deeper, there is evidence of progress. Given Manitex’s leverage to what I expect will be healthy markets in construction, utilities, rail, and oil/gas, and particularly with the leverage that the infrastructure bill could provide, I think this is a high-risk name still worth some consideration.

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Disclosure: I/we have a beneficial long position in the shares of MNTX either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.