Columbus McKinnon Under Pressure Now, But The Longer-Term Opportunity Is Intriguing

In an already-tough market for capex-oriented industrials, Columbus McKinnon (NASDAQ:CMCO) hasn’t done itself any favors with an outlook that led sell-side analysts to lower their short-term expectations for both revenue and margins. With that, the shares have lost about a third of their value since my last update on the company, underperforming not only the industrial sector, but other plays on industrial motion/automation as well.

I don’t believe the long-term story at Columbus has changed as dramatically as the valuation, but it’s clear that the market isn’t interested in capex plays at a time when industrial orders are contracting, margins are still under pressure, and demand is likely to cool off noticeably in the second half. While margin worries are going to understandably weigh on sentiment for a while longer, I do think this is a beaten-down name worth another look.

 

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Columbus McKinnon Under Pressure Now, But The Longer-Term Opportunity Is Intriguing

Columbus McKinnon's Transformation Still Not Fully Reflected In The Shares

Change takes time, but Columbus McKinnon (NASDAQ:CMCO) has made it clear that they’re serious about transforming into a higher-value-added provider of automation-enabling machinery and generating stronger margins in the process. Multiple M&A transactions have augmented the company’s product lineup, while the newest iteration of the company’s Blueprint for Growth strategy continues to offer avenues to margin improvement.

When I wrote about Columbus last summer, I said I saw a window of opportunity in the shares. That window has stayed propped open longer than I expected, though the shares have kept pace with the wider industrial sector while slightly underperforming the S&P over that time. With mid-single-digit long-term revenue growth potential, improving margins, and the possibility of double-digit ROIC in FY’23, I still see meaningful potential in these shares today.

 

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Columbus McKinnon's Transformation Still Not Fully Reflected In The Shares

Columbus McKinnon's Recent Slide Creates A New Window Of Opportunity

 

Shorter-cycle industrial companies leveraged to the ongoing manufacturing recovery haven't really been in favor lately, and Columbus McKinnon (CMCO) shares have slid about 10% since my last update. That comes despite a late May earnings report that was pretty good, not to mention ongoing opportunities to leverage the company's capabilities into more advanced material handling and intelligent motion markets, as well as the recent Dorner acquisition.

Columbus McKinnon isn't a particularly sexy stock, and given the recent concerns that the industrial recovery is already peaking, I can understand why some investors may be looking elsewhere. I believe that's a mistake, though, as Columbus McKinnon is making investments into product development that many of its rivals aren't, and I believe the company is looking at mid-single-digit long-term revenue growth and improving margins as it grows market share, improves its go-to-market strategy, and leverages product/market expansion opportunities.

 

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Columbus McKinnon's Recent Slide Creates A New Window Of Opportunity

Columbus McKinnon Doing The Heavy Lifting To Build Long-Term Shareholder Value

Moving things around a factory, plant, or mill may not be the sexiest business out there, but it’s pretty essential and as companies continue to turn to automation, material handling is going to become increasingly important. On top of that, Columbus McKinnon (CMCO) has shown that it can execute on margin-improvement initiatives, portfolio restructuring, and product R&D, as well as value-added R&D.

That’s the elevator pitch for Columbus McKinnon, and these shares have done well since I last identified them as an underrated industrial back in August of 2020. While the 50% or so move in the stock since then (almost 20% better than the broader industrial sector) as soaked up a lot of the undervaluation I saw, I do still see better long-term return potential here than for the average industrial, and I think Columbus McKinnon is on a credible path to above-average underlying performance.

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Columbus McKinnon Doing The Heavy Lifting To Build Long-Term Shareholder Value

Columbus McKinnon Braced For The Downturn, With A New CEO To Drive Future Growth

As a company tied to industrial production, Columbus McKinnon (CMCO) is already seeing a severe hit to its business, and that’s only going to get worse in the June quarter. Looking beyond the next couple of quarters, though, the company is in a pretty strong position having successfully executed on a multiyear plan to improve manufacturing and supply chain efficiency, eliminate non-strategic businesses, and simplify the portfolio. Now the company is transitioning to more of a growth phase that will include investing in automation-enabling technologies and pursuing select M&A.

Since my last update on the company, industrial production has plunged, but the company has hired a new CEO. If low-to-mid single-digit revenue growth and low double-digit FCF margins remain reasonable long-term assumptions, Columbus McKinnon shares look undervalued today with a double-digit long-term annualized total return potential.

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Columbus McKinnon Braced For The Downturn, With A New CEO To Drive Future Growth

Columbus McKinnon A Victim Of Its Own Success With An Unexpected CEO Transition

Success is, on the whole, a good thing. Even so, it can create its own set of problems, and Columbus McKinnon (CMCO) shareholders are seeing that today (December 11), as the shares are selling off on the surprising announcement of the CEO’s resignation to take the top spot at Fortive’s (FTV) NewCo spinoff.

I believe the loss of Mark Morelli is a significant one, as he oversaw a transformational restructuring process (Blueprint for Growth) that has seen Columbus McKinnon slim down and focus on growth opportunities in material handling, and automation in particular. Although I think Morelli leaves the company much better than he found it, the process of finding a new CEO could well put the transformational process on “pause” and there are always uncertainties when new leadership is brought into a successful situation.

I’m cautiously optimistic that Columbus McKinnon will navigate this transition well – I believe the board has clearly seen the benefits of the strategy Morelli espoused and implemented, and I would expect the board to find a new CEO who will run the company along broadly similar lines. I’m boosting my discount rate by a point to account for the added risk, but the shares are still worth considering.

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Columbus McKinnon A Victim Of Its Own Success With An Unexpected CEO Transition

Short-Term Cyclical Pressures Overshadowing Columbus McKinnon's Long-Term Potential

This isn’t the easiest time to be bullish on industrial names, and particularly those companies like Columbus McKinnon (CMCO) that are more heavily skewed to cyclically weaker end-markets likes autos, oil/gas, metal processing, and heavy industry. Management has acknowledged those cyclical pressures with lower guidance, and the shares have fallen a bit since my last update in May.

I’m still bullish on the company’s longer-term potential. Management has made meaningful progress on its restructuring program, including cost reduction, productivity improvement, and portfolio realignment, and the lends credibility to a long-term EBITDA margin target around 20% (versus the mid-teens today). I also believe Columbus McKinnon is an underappreciated emerging play as a facilitator of increased automation in heavy manufacturing and material handling. I wouldn’t be surprised if there is another cut to guidance, and investors may want to hold off in anticipation of this, but with a fair value in the low-to-mid $40’s, I see value for longer-term holders.

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Short-Term Cyclical Pressures Overshadowing Columbus McKinnon's Long-Term Potential

Meaningful Progress At Columbus McKinnon Going Seemingly Unnoticed

Columbus McKinnon (CMCO) is a bit of a puzzler to me now. Despite racking up multiple quarterly EBITDA beats in a row and eight quarters of year-over-year gross margin improvement, the shares are about 15% lower than they were last time I wrote about this leading player in material handling, and that was closer to down 25% before a big post-earnings reaction. Granted, industrials haven't done so well over that same period, and there are valid concerns about slowing end-market demand, but I'm still surprised the improvements in the business aren't being better reflected in the share price.

More than a third of Columbus McKinnon's revenue comes from end-markets/sectors that I'm concerned about today, but the company is gaining share and management expects another four points or so of EBITDA margin improvement from fiscal Q4'19 levels. With increased R&D spending going towards automation-enabling product development and my expectation of low-to-mid single-digit long-term revenue growth, mid-single-digit FCF growth, and low-double-digit ROIC, I believe these shares offer meaningful upside even with the risk of a sharper near-term slowdown in the business.

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Meaningful Progress At Columbus McKinnon Going Seemingly Unnoticed

Efficiency Initiatives, M&A, And Cycle Have Boosted Columbus McKinnon

Columbus McKinnon (CMCO) is off the beaten path, and at around $1.3 billion in enterprise value it is certainly a smaller industrial, but this company is a leading player in material handling products like hoists, industrial cranes, controls, and actuators. Not only has the company gotten a noticeable boost in recent years from acquisitions and cyclical recoveries across a range of industrial end-markets, but the company has also done an excellent job of executing on the (relatively) new CEO’s vision for a leaner, more dynamic Columbus McKinnon.

Although the shares have outperformed the industrial sector this year (and significantly outperformed over the past two years!), this may not be the end of the opportunity. I’m a little nervous about projecting high single-digit to low double-digit FCF margins for a business like this, but it’s hard to argue with the margin improvements that the company has already made, as well as the opportunities in product simplification and R&D re-investment.

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Efficiency Initiatives, M&A, And Cycle Have Boosted Columbus McKinnon

Columbus McKinnon Poised For An Industrial Recovery, But So Is The Street

This may be obvious to many readers and investors, but timing is an invaluable part of the investment process. A couple of months ago, Columbus McKinnon (NASDAQ:CMCO) would have looked like a significantly undervalued and overlooked play on a general industrial recovery, not so much an underappreciated leader in the material handling market with a catalyst from increasing automation.

Fiscal second quarter earnings were quite encouraging regarding that recovery, though, and the recent Presidential election only strengthened investor conviction, taking these shares up almost 60% since the day before second quarter earnings. I do believe that recovery will come, though, and the recently-announced deal for Konecranes' (OTCPK:KNCRY) STAHL business should benefit revenue, margins, and cash flow in the years to come.

With an underlying expectation of mid single-digit revenue growth and high single-digit cash flow growth supporting a fair value of about $28, Columbus McKinnon still has some appeal, but it would definitely be a name to watch for a pullback if this rally hits the rocks.

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Columbus McKinnon Poised For An Industrial Recovery, But So Is The Street

Investopedia: Eaton Shows Broad Recovery Continues

Conglomerates like Eaton (NYSE:ETN), Dover (NYSE:DOV) and Illinois Tool Works (NYSE:ITW) can be a pain for investors to follow with all of their moving parts. On the flip side, they can also give you a quick look at a wide range of industries and how they're performing at any point in time. To that end, while a weak aerospace industry is still a drag on Eaton, overall there continues to be a strong recovery across many industry segments. (To read more on conglomerates, check out Conglomerates: Risky Proposition?)


Good On Top, Not So Good in the Middle
Eaton seemed to have no problem booking sales in the first quarter. Overall revenue rose nearly 23% and surpassed the high end of the analyst range by about $100 million. Within the overall revenue number, the electrical business was a standpoint performer with 21% growth, and that's clearly a good thing as the electrical business is nearly 45% of the total. The hydraulic, automotive and truck segments all showed very strong growth as well, while the aerospace business was a laggard at just over 3% growth.

Top-line performance was clearly strong for Eaton, but profitability was a bit more problematic. Gross margin did increase slightly and the company did deliver over 61% growth in operating income but expectations were broadly higher than this - particularly problematic since the company surpassed revenue estimates so handily. Aerospace and automotive were relative laggards (segment operating profit margins declined), while the other units simply failed to improve as much as hoped. Still, overall segment profit growth of 46% is hardly a bad outcome. (To learn more about this type of analysis, See Fundamental Analysis For Traders.)


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