A Heavy-Duty Lift from Chinese Growth
06/27/2011 7:30 am EST
At the base of Chinese growth is Chinese goods production, and this company has its finger on the pulse of that core growth component, observes Peter Staas of Personal Finance.
Investors and analysts have long relied on data and commentary from the transportation industry—the economic equivalent of the body’s circulatory system—to gauge the health of individual sectors as well as global and local economies.
This higher-level information tends to focus on railroads, seaborne shipping, and truckload hauling. But investors shouldn’t overlook the forklift market.
In China, India, and other developing economies, forklifts (or lift trucks in industry parlance) improve warehouse efficiency and replace manual operations. March 2011 was a record month for lift truck orders from China.
Portland, Ore.-based Cascade Corp’s (CASC) market capitalization of $479 million places the stock well within small-cap territory—but with a roughly 50% share of the global market, the company is well-positioned to take advantage of big growth opportunities in the global forklift market.
Cascade designs, manufactures and sells the “fork” portion, the materials-handling parts that enable these vehicles to lift, rotate, tilt, and deposit any imaginable items.
In fact, management often trumpets the breadth of its end markets by noting that at some point in the supply chain, its equipment has touched every item in the modern home—from the milk in the refrigerator to the insulation in the attic.
Cascade continues to benefit from recovering demand in the US and Canada. Management recently noted that in the fiscal first quarter ended April 30, the firm received sizable orders from several customers that had halted spending on new forklifts during the economic downturn.
First-quarter revenue in the Americas was up 57% from year-ago levels. The company expects this robust demand to last through the end of the year.
Meanwhile, efforts also paid off to restructure the company’s lackluster European operations—a geographic segment that hadn’t turned a profit since the third quarter of 2008—by cutting low-margin business and adjusting prices.
In the three months ended April 30, an uptick in order volume and a favorable product mix enabled this underperforming business line to eke out operating income of $3.1 million, and gross profit margins of 21%.
Cascade’s developed markets will continue to generate ample cash flow, but barring the acquisition of a smaller player, opportunities for long-term earnings growth are hard to come by in these regions.
Emerging economies represent the best opportunity for Cascade to expand its revenue, and management continues to invest in building the firm’s presence in these high-growth areas. At present, the firm boasts offices in Mumbai, India and Johannesburg, South Africa, as well as production facilities in Brisbane, Australia and Hebei and Xiamen, China.
Of these markets, China offers the most compelling growth opportunities. Not only has Cascade operated in China for more than 20 years, but the country’s demand for lift trucks also continues to grow at a rapid rate. In the company’s fiscal first quarter, sales to Chinese customers jumped 41% from year-ago levels.
The company also has identified the Brazilian market as a focus for future growth initiatives. Sales in countries other than the US and Canada currently account for less than 10% of Cascade’s revenue in the Americas.
Management has indicated that the company’s robust cash flow and strong growth prospects could set the table for a dividend increase. Buy Cascade up to $46.