Manitowoc Food Service: An Exciting Earnings Growth Opportunity

Manitowoc Food Service is a leading foodservice equipment manufacturer and supplier of a portfolio of hot and cold products across ice-making, cooking, preparation and beverage dispensing. The firm strives to have the No. 1 or No. 2 market share in every segment it operates in.

The company has a diversified customer base across restaurants, fast-food, hotels, caterers and supermarkets including McDonalds, KFC, Starbucks, Chipotle and Walmart to name but a few. Sales are also diversified by geography with 75% being generated in the Americas while EMEA and APAC customers contribute 15% and 10% respectively. The firm’s products are sold through a global network of 3,000+ distributors across 100+ countries.

In addition, the company benefits from a very predictable sales cycle with 85% of demand being driven by product replacements and renovations while the remaining 15% of sales is generated by recurring, higher margin after sales services and parts.

There are two factors that are likely to generate significant shareholder value over the next 2-3 years.

1. Industry Growth

The global foodservice equipment industry is excellently positioned for long-term growth as a result of the following:

  • Growth in global population;
  • Growth in eating out culture as a result of hectic lifestyles and increasing disposable incomes particularly among young people;
  • Growth of new fast food dining concepts such as Chipotle Mexican Grill and Shake Shack;
  • Growth of international food service markets – while the USA has c. 100 restaurants per 1 million people, China has c. 20 restaurants per million people and Brazil has c. 5 restaurants per million people;
  • Increased food safety requirements is resulting in food service operations looking for modern and professional food service equipment that reduces the risk of infection, limits food waste and spoilage and is environmentally sustainable.

The global foodservice equipment industry is forecasted to grow at a +4.5% CAGR until 2020 providing significant organic growth opportunities for the company.

2. Margin Expansion

Along with the excellent opportunity to grow top line sales, the firm aims to increase EBITA margins by 10% over the next 2-3 years from the mid-teens to the mid-twenties.

The company aims to achieve this by simplifying operations to reduce the range of products offered, optimising manufacturing and aftersales support and reducing overall headcounts.

An improvement in operating margins of this scale will have a sizeable effect on the company’s profitability, return on capital and shareholder returns.

Financial Forecasts

The below table estimates forecasted improvements in the operating performance of the company based on moderate sales growth of 3% in 2017 and 2018, notable EBITDA Margin improvement from 17% in 2016 to 18% in 2018 and total debt reduction of c. $265m during the same period. We believe that these estimates are conservative when compared with the industry’s forecasted annual growth rate and the company’s own margin objectives as outlined above.

2016(e) 2017(e) 2018(e)
Sales $1,444m $1,487m $1,532m
EBITDA $245m $260m $276m
EBITDA Margin 16.97% 17.50% 18.00%
Net Income $83m $107m $129m
Net Margin 5.71% 7.19% 8.39%
EPS $0.60 $0.77 $0.93
Total Debt $1,280m $1,155m $1,015m
Invested Capital $1,169m $1,151m $1,140m
Return on Invested Capital 7.06% 9.30% 11.28%

Company Valuation

Assuming EPS growth of c. 25% in 2017 and 2018, a conservative P/E of 30x forecasted EPS for 2016 would provide an attractive entry point below $17.88. The current share price is $15.93.

Legal Information and Disclosures

This memorandum expresses the views of the author(s) as of the date indicated and such views are subject to change without notice. Elenchus Capital Management Limited has no duty or obligation to update the information contained herein. Further, Elenchus Capital Management Limited makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.

This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Elenchus Capital Management Limited believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.

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