Modine Manufacturing: Temporary Dip Or?

Solid earnings growth this year and next; moving from cars to trucks.

Execution risk from new focus; still very small company. Modine Manufacturing Company

engages in the development, manufacture, and marketing of heat exchangers and systems for use in on-highway and off-highway original equipment manufacturer (OEM) vehicular applications, and to various building, industrial, refrigeration, and fuel cell markets. It sells power train cooling products, including engine cooling modules, radiators, charge-air-coolers, condensers, fan shrouds, and surge tanks; on-engine cooling products comprising exhaust gas recirculation coolers, engine oil coolers, fuel coolers, charge-air-coolers, and intake air coolers; oil coolers consisting of transmission oil coolers and power steering coolers; and fuel coolers. The company also makes gas-fired, hydronic, electric, and oil-fired unit heaters; indoor and outdoor duct furnaces; infrared units; hydronic products, including commercial fin-tube radiation, cabinet unit heaters, and convectors; roof mounted direct and indirect fired makeup air units; unit ventilators; close control units for precise temperature and humidity control applications; chillers; ceiling cassettes; and condensing units and coils for heating, refrigeration, air conditioning, and vehicular applications. Its customers include truck, automobile, bus, specialty vehicle, agricultural and construction, and heating and cooling OEMs; construction contractors; wholesalers of plumbing and heating equipment; fuel cell manufacturers; engine manufacturers; industrial manufacturers of material handling equipment, generator sets, and compressors; and various end users. The company sells primarily in North America, Europe, South America, Africa, and the Asia/Pacific region. The company was founded in 1916 and is headquartered in Racine, Wisconsin. You could have bought all the MOD you wanted for 70 cents in 2009. Later in the same year, the stock would cost $12.70. In 2008, MOD plummeted from $19.60 to $3.10 in three months. Caution is warranted. Still for aggressive investors, this is an intriguing story, especially for those who think the auto and truck business is just getting ramped up. Sales slipped in 2009 to $1.163 billion, down from $1.408 billion in '08. But they bounced back in 2010 to $1.448 billion. This year, 3 analysts have a consensus estimate of $1.7 billion, an increase of 17%. For 2012, they see $1.87 billion, another 10.2% improvement. Earnings followed the same pattern, only more pronounced. In 2008, earnings per share (

) were negative (-$3.23). (2007 was positive at 67 cents.) Then they improved in 2009 but were still in the red by 52 cents a share. Last year, they went green to 63 cents. This year is another big improvement. Four analysts have a consensus opinion of $1.02 for 2011, then see $1.45 in 2012. Clearly, things are back on track at MOD. In the second quarter, revenues were up 21%. Sales were strong in all geographic markets. Earnings came in at 28 cents a share, well above the 23 cents analysts predicted. In the first quarter, earnings beat expectations by 37.5% to 22 cents vs 16 cents forecast. In the last quarter of 2010, earnings were above estimates by 55.60%. In the third quarter of 2010, they were ahead by 400%. Breaking down the second quarter sales gains by region: 11% in the U.S.; 11% in Europe; 16% in South America; and 77% in Asia. There's a global rebound in commercial and off-road vehicles. MOD reflects it. Still, there's enough economic concern to bridle some of this enthusiasm, especially in Europe, then more particularly in Greece, Portugal, Spain and Italy. As for Asia, growth was strong over the last year but is starting to moderate. The company is going through an evolution, focusing more on trucks as it weans itself from automobiles. It's also expanding in Asia where sales have grown more than other regions. Further, there are several new products being introduced this year. All of these efforts have some hazards attached, especially if demand were to soften.

Investors who like a turnaround story will find this one interesting. Be very aware that the volatility in this stock is much higher than most (the Beta tells you everything). It's still very small and can get thrown off track quickly (see those 2008 numbers). But it's growing, evolving, and branching out into new regions as well as products. If management can keep delivering those quarterly upside surprises in earnings, this stock should improve significantly. Company Web site:

- Ted Allrich

September 29, 2011