Hyster-Yale Appeals To My Small-Cap/Value Roots, But It Isn't Yet Buyable

seekingalpha08-15

I’ve written a lot lately about big-time growth stocks.But my roots are in small-cap value, and Hyster-Yale takes me back to that.But as many find out later in life, going home can be hard.Although ...

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Those who’ve been following me since I returned to Seeking Alpha back in early May might find that hard to believe. Thus far, I have written up analysis for 19 stocks (and five ETFs). Seven presently have Seeking Alpha Value Grades of F. Seven more rate D or D-. There are four that rate C or C-. Only one scores A. But I really am one of you. Back in 2002, I published a book called The Value Connection. And in the mid-2000s, I wrote a newsletter called the “Reuters Value Review.” I understood outspoken Twitter-famous quant Clifford Asness. In 2020, just before the pandemic shutdowns, he published a rant titled Never Has a Venial Sin Been Punished This Quickly and Violently. (The so-called venial sin was caring about value). But empathy doesn’t necessarily mean agreement. Here at Seeking Alpha, (and in my book and newsletter) I explained how high valuations can match with powerful growth prospects. You see, I read the valuation theory fine print... growth counts too, a heck of a lot. Yet as objective as I often am, sometimes, I want to simply say “value” and leave it at that. No theory. No explanation. Just low ratios. That’s what attracted me to Hyster-Yale (NYSE:HY). It’s Seeking Alpha Value Grade is presently A+. Going Back to my Roots Despite all the rigmarole about expected future growth (and even though that stuff is correct), it feels darned good to see truly low ratios. Check out these numbers… Author's computations and summary from data displayed in Seeking Alpha Portfolios (I compare companies to medians since these aren’t impacted by wild distortions often caused by unusual data items, even in big companies that can dominate weighted averages). The Industry to which I compare HY is “Industrial Machinery & Supplies & Components.” I also show the standard SPDR S&P 500 ETF (SPY) benchmark. And given its small size, I also compare HY to the SPDR Portfolio S&P 600 Small Cap ETF (SPSM). Regardless of which comparison you examine… How often do you see company valuation numbers like that nowadays! And, as per the title of this article and my use of SPSM as a benchmark, HY checks off another of my favorite boxes… small cap. Throughout my quant career, I’ve often seen models working better and better as issue size gets smaller and smaller. To be sure, it’s been exciting to write up the mega-sized tech-AI giants on Seeking Alpha. And I’ll keep on doing so. Even so, it’s good to let HY take me home to small value. But as many who hit the road at various stages of life have discovered… It Can Be Hard to Go Home If you left home and returned in real life, you may know what I mean. Rooms look and feel smaller than you remember. Close friends no longer seem as close as they once were (if any are even still there). What once seemed shiny and cool may now seem drab and gloomy. Your favorite restaurants and shops may be gone. You don’t hate your old home. I’ll bet you still love your family. But returning can make you remember why you left. Digging into HY feels similar. There’s a lot I like about this company. My heart wants to say “Buy.” And I may get to do that early next year. But not today. Now, it's reminding me why I’ve been working on bigger, higher-priced companies. It’s hard to really invest in traditional small -cap value. Check out my last micro-cap write-up, Mama’s Creations (MAMA). There, I describe inherent challenges all small companies face due to fixed costs and diseconomies of scale. This is present for HY too. But there’s more. For most of us, pandemic shutdowns are now just a bad memory. But many businesses continue to feel lingering impacts. I couldn’t blame you if, by now, the phrase “supply chain” goes in one ear and out the other. Don’t be blasé. Problems persist in many respects, even if the headlines are gone. And even after they’ve been solved, we’re not out of the woods. Production and inventories can’t be re-normalized at the snap of the finger. This takes time. And because these situations are so unusual (“outliers”), manufacturers, vendors and customers don’t have good data upon which they can build forecasts. Erroneous assumptions and decisions are understandable… almost inevitable. I wrote up a company on my last job that got hit with this. Management assumed wrong. Its customers assumed wrong. My write-up assumed wrong. And I read about many more such situations. HY is in the midst of a situation like that right now, in my view. A Great Business Going Through a Prolonged “and Multifaceted Perfect Storm” HY’s main business is making lift-trucks (some call them forklifts). That sounds quite dull. And this, believe it or not, is a bullish trait. In his classic One Up on Wall Street, superstar investor Peter Lynch labelled Chapter 8 “The Perfect Stock, What a Deal!” He described one attribute of such a stock as “It Does Something Dull” (page 131). HY’s single-digit P/E illustrates Lynch’s reasoning. Investors don’t care. They aren’t bidding the price up. The Lynch boring-is-bullish theory presumes the company is doing well. Eventually, he suggests, the Street will notice. Investors would then bid the stock price up. But for a HY, this may take time. Right now, the stock’s valuations are low for good reasons. Earnings have been messy since the pandemic. And they still are. Business shutdowns followed by messy supply chains produced weird order patterns… an abnormal surge followed by a corrective drop. Here’s the lift truck backlog and booking tallies for the most recent quarter. I put them in context by showing a ten-year trend. (Each year’s second quarter is compared to the prior years’ second quarter).   Analyst compilation from HY earnings releases Notice the 2021-22 post pandemic surges. How could anybody at the company (or on Wall Street) model that! Would you have wanted your job to depend on making accurate predictions for 2023 and 2024? Adding insult to injury (challenge on top of challenge), supply chain wasn’t the only problem. Remember how in 2022 inflation jumped. And so, too, did interest rates. Responsible corporate executives had to plan for a hard-landing recession. We didn’t get that. But nobody should blame companies for acting on widespread forecasts issued by credible economics experts. So, there was a lot going on, and much of it was bad. Not surprisingly, HY didn’t get things right. On the August 7, 2024, earnings call, CEO Rajiv Prasad described it as follows:  Current market data from the Industrial Truck Association or ITA showed a 56% year-over-year decrease in quarter two, 2024, North America factory bookings. These reduced North America factory booking rates were expected compared to the highly elevated levels reached during the pandemic and subsequent period of supply chain shortages That said, the decline was steeper and earlier than we anticipated. In effect, these recent low factory booking levels are quickly moving total average bookings back towards a normalized growth trend line. The company expects below trend North America factory bookings levels to continue into early 2025. After this relatively short period of demand correction, the market is expected to return to more normalized growth rates over time.  These tables show the results of the difficult period. And they show the anticipated climb back up. Analyst Compilation based on Data from Seeking Alpha Earnings and Financials PresentationsAnalyst Compilation based on Data from Seeking Alpha Earnings and Financials Presentations Actually, it looks like HY has passed the low point of its business. Orders haven’t been as bad lately outside North America. That’s likely to prevent a serious revenue collapse. But it probably won’t prevent EPS from falling in 2025. And speaking of EPS, notice how much more volatile this has been compared to changes in sales. That’s the small company fixed cost burden to which I referred while discussing MAMA. A Business That’s Much More Interesting Than Its Boring Image Suggests Small-cap investing can be very rewarding… but as we saw above, it can be darn hard. It’s about serious individual-company analysis. Still, I love doing it. Tell the truth now… Even if you owned the Magnificent 7 stocks while they were soaring, did you really feel like a part owner of the business? It’s OK. You can admit you probably felt like just one of many, many shareholders in the public equity market. (Before share ownership became recorded electronically, you might have said you owned “pieces of paper”). With a tiny company like HY, you can get a much firmer grasp on what’s going on. You can really feel like an owner. (With bigger stocks, your ownership is based only on the details of business law.) So let’s now focus on the business… what HY could become once it gets earnings back on track. (That will happen with the passage of time). I assume you average about zero minutes per day thinking about lift trucks. But you spend a lot of time indirectly influenced by them. HY tells us that “these are integral to our lives.” HY IR So, on first impression, we might assume the company’s sales track GDP trends. Actually, management is targeting more than that. HY IR The second rung of that “ladder” depicted above resembles what many other companies do. HY provides a lot of support, particularly via independent dealers it uses for much of its distribution. This may not be unique. But it’s an important part of the business. The top rung, technology, is where the heavy action is likely to be. Today, we’re well aware of spectacular-tech. See, for example, AI. But don’t underestimate little-tech. HY IR Nothing here measures up to AI apps that can write about your significant other in the style of a Shakespearean sonnet. But if you were an operations or financial manager of a warehouse or factory, HY’s tech can prove more beautiful. It can save you money, and perhaps lead to you getting a better bonus. HY is also working to make it much easier to find the exact kind of lift truck your operation really needs. And this isn’t just altruism. HY is helping itself too by making itself able to cost-effectively serve a greater variety of customer needs. HY IRHY IRHY IR On the whole, it seems as if HY is working to become the premiere lift truck seller. Perhaps it may become the Amazon.com of forklifts! HY IR Again… this isn’t glamorous, or even interesting in the eyes of most people. But outperforming GDP, as HY aims to do, is a darn good thing. That’s especially if the stock isn’t commanding nosebleed valuations. And lest we dismiss HY’s GDP+ goals as wishful thinking, let’s review a summary of what makes the aspiration reasonable. HY IR Making and selling products keyed into global megatrends is about as credible a strategy as any company can pursue. Absent excess valuations (which we don’t have here), a bedrock principle of fundamental analysis is that what’s good for a company becomes good for shareholders. Here’s how HY expects its strategy to serve the company. HY IR Everybody has their own way of calculating fundamental ratios like Operating Margin and ROTCE (Return on Total Capital Employed). Let’s adapt where feasible to Seeking Alpha language (a good way to keep authors and readers on the same page). Most companies and data vendors I’ve encountered define Operating Margin identically or very close to Seeking Alpha’s EBITDA. HY’s Profitability presentation shows its trailing 12-Month EBITDA is 7.77%. That’s well above its perfect-storm-era 5-year 2.22% average. The definition of Working Capital (WC) is universal. It’s Current Assets minus Current Liabilities. HY’s WC-to-sales ratio needs work. It’s now 8.4%. That’s well below the company’s target. But the 15% target is not mere wishful thinking. It was 15.2% in 2017. It slid a bit. It was 11.2% in 2018 and 10.3% in 2019. By 2020, the pandemic year, it recovered to 13.3%. Then, all you-know-what broke loose (see above). It came in at 8.0% in 2021 and 3.3% in 2022. In 2023, it recovered slightly to 6.6%. So, the current 8.4% tally is at least on the right track. The image shows HY plans to get it higher. I want to add to that. Author's computations and summary from data displayed in Seeking Alpha Portfolios The LTD to Total Capital ratio is fine. So, too, is Interest Coverage. But I won’t say likewise about Debt to FCF and Debt to Equity. The issue with HY is Short-Term Debt (including the portion of what was Long-term Debt that has now become due within one year). Short-Term Debt is a Current Liability. That means it pulls WC down. This isn’t about leverage per se. Again, HY’s interest coverage and long-term debt are ok. But I’ve seen far more company crises arise from liquidity problems than a lot of debt per se. WC is one measure of liquidity. So, shareholders should be in favor of managements 15% WC-to-Sales target. (Bigger, stronger companies can get by with less. So, too, do companies that sell for cash every day. For a manufacturer HY’s size, 15% is a good goal). I believe it will need to cut short-term debt to reach its target. Meanwhile, ROTCE is an in-between sort of ratio. The “denominator” of the fraction typically is less than Total Assets, but more than Common Equity. Referring to the above Fundamentals table, HY’s ROCE should fall in between Seeking Alpha’s Return on Assets (ROA) and Return on Equity (ROE). I can’t pinpoint exactly where HY’s current ROTCE comes in. Seeking Alpha says ROTCE is 19.35%. Assuming the two computations are similar, it looks like HY is near its target. HY’s clear relative strength in ROA and ROE (the ratios I regularly use), is impressive. So, I’m very satisfied with where the company is in this regard. I need to mention two other subsidiaries, Bolzoni and Nuvera. They’re both very small. Author Compilation and Calculations based on data from page F-16 of latest 10-K and pages 20-21 of latest 10-Q Bolzoni makes lift truck attachments. Those are the red gizmos we see in the illustrations below. HY IR Bolzoni is too small to generate shareholder excitement on its own. But these attachments are valuable to customers in the business’ target industries. And I wouldn’t be at all surprised if HY were to suggest these to entice customers to use HY, as opposed to rivals, for lift trucks too. I’ll discuss Nuvera below… Risk Nuvera, which makes hydrogen fuel cells, is a noticeable money loser (see above Segments table). Some investors hate that HY owns it. And during a February 25, 2021 earnings call, two analysts were shockingly, and perhaps unprofessionally, blunt in bashing HY for not selling it. CEO Al Rankin responded that… We are in the fuel cell business for the long-term. One way or another, we think it’s a tremendous business. And we’ll be attending to it in the way that the management and the Board collectively think is the best way to manage the business for the long-term. So again, I’d leave it at that. Here are the opportunities HY sees. HY IRHY IR I hear Rankin. I’m among those who praise Amazon.com (AMZN) for having stared down myopic investors and did what it believed would be best for the long term. The risk is that HY may be too small to continue to incubate Nuvera for too long. As to other risks, we’ve already touched on them. There are small-cap diseconomies of scale. There’s the still imperfect balance sheet. There’s the economy. There’s inflation. There’s the supply chain. As noted, HY looks to be moving past the worst. But these are still sources of risk. That’s especially so given how harshly we still see investors reacting to disappointments… What to do About HY Stock There are many words for HY’s 2024 price action: StockCharts.com The most printable is “Ouch!” HY’s chart could illustrate a dictionary that defines “volatile.” It’s like a small cap on steroids. I suppose the best news is that once the selling is done, the stock finds a new level, at least until the next item of earnings news comes out. Obviously, investors weren’t pleased to learn 2025 wouldn’t be great. I’m tempted to recommend purchase of what’s now a deep value play. But we know what it will take to get the stock moving back up… better earnings news. We might not see that until late 2025. Assuming the stock price reflects future expectations, we could start to see some strength, perhaps as we approach mid-2025. But there’s no rush to buy now. As I’ve said before, my investment stance depends mainly on whether I think a stock will be better than, in line with, or worse than the market. Here’s how I apply that to the Seeking Alpha rating system:  “Strong Buy” means I see the stock as being better than the market, and I’m bullish about the direction of the market. “Buy” means I see the stock as being better than the market, but am not confident about the market’s near-term direction. “Hold” means I see the stock as moving in line with the market. “Sell” means I see the stock as being worse than the market, but am not confident about the market’s near-term direction. “Strong Sell” means I see the stock as being worse than the market, and I’m bearish about the direction of the market.   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