Even during a down period for the markets, Manitowoc has gone against the grain, climbing to $10.84. Its shares have yielded a 6.2% return over the last six months, beating the S&P 500 by 8.6%. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
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Why Do We Think Manitowoc Will Underperform?
We’re glad investors have benefited from the price increase, but we're cautious about Manitowoc. Here are three reasons why you should be careful with MTW and a stock we'd rather own.
1. Backlog Declines as Orders Drop
Investors interested in Construction Machinery companies should track backlog in addition to reported revenue. This metric shows the value of outstanding orders that have not yet been executed or delivered, giving visibility into Manitowoc’s future revenue streams.
Manitowoc’s backlog came in at $793.7 million in the latest quarter, and it averaged 12.4% year-on-year declines over the last two years. This performance was underwhelming and shows the company is not winning new orders. It also suggests there may be increasing competition or market saturation. 
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Manitowoc, its EPS declined by 41.8% annually over the last five years while its revenue grew by 4.3%. This tells us the company became less profitable on a per-share basis as it expanded.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Manitowoc historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 1.5%, lower than the typical cost of capital (how much it costs to raise money) for industrials companies.
Final Judgment
We see the value of companies helping their customers, but in the case of Manitowoc, we’re out. With its shares outperforming the market lately, the stock trades at 14.5× forward P/E (or $10.84 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better stocks to buy right now. We’d recommend looking at the Amazon and PayPal of Latin America.
Stocks We Would Buy Instead of Manitowoc
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