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From the Survey: Cascade Corporation
Cascade Corporation (CASC) is a leading global manufacturer of materials-handling load-engagement devices and related replacement parts, primarily for the lift truck and construction industries. It was formed in 1943 in Portland, Oregon as a small machine shop and gradually grew to develop and produce an assortment of machine-related products, including hydraulic cylinders, which came to serve as the basis for its current materials-handling product profile.
Cascade went public in 1965, and has since expanded to include numerous product offerings and production facilities worldwide through organic growth as well as various acquisitions. With the exception of its largest competitor - Bolzoni Auramo, a publicly traded Italian company - most of the company’s competitors are privately owned and deeply entrenched in local and regional markets.
Cascade’s products give lift trucks the capability to engage, lift, reposition, carry, and deposit various types of loads and products, and are available in numerous sizes, models, capacities, and combinations. The primary materials used in the manufacturing process include various steel products, hydraulics components, and hardware items.
After production, the products are sold to end-user customers (which comprise roughly 60% of consolidated sales) through retail lift truck dealer distribution channels, and to lift truck manufacturers (which comprise the other 40%); these manufacturers, known as original equipment manufacturers (OEM’s), use certain of Cascade’s parts in the assembly and sale of completed lift trucks under their own name.
A significant portion of revenues are derived from outside of the U.S.; In fiscal 2009, which ended January 31, 2010, roughly 26% of sales came from Europe; 14% came from the Asia Pacific region, and 11% came from China. Lately these proportions have been shifting in favor of Asian Pacific and Chinese markets, which have the greatest opportunities for growth.
The health of the lift truck industry is influenced by a number of factors, but ultimately by demand from end users. Such end users are typically companies involved in manufacturing or construction, which require efficient ways to lift and carry their products. These industries have historically been very cyclical, i.e., highly dependant upon general economic conditions. As of late, these conditions have been mixed; following the 2007-2009 recession, the global economy has been recovering at a two-speed rate: slowly in developed economies, such as Europe and the United States, and quickly in developing economies such as the Asia/Pacific region and China.
As such, lift truck shipments, which are used as an industry metric for market strength, have reflected different trends according to region: in the United States and Europe, shipments are beginning to pick up, but are still far removed from their 2006-2007 peaks; in the Asia/Pacific area, shipments have nearly recovered to pre-recessionary levels; meanwhile, shipments in China have been on a tear, and are reaching one new high after another.
As enumerated above, Cascade’s profits are not very well-insulated against economic hardships. Accordingly, the recession dealt a considerable blow to the bottom line in fiscal 2009, concurrent with a steep decline in the company’s stock price. Since then, however, profits and the stock price have rebounded considerably. Moreover, as sales increase, the company should begin to benefit from better fixed-cost absorption, which, in turn, may lead to a wider operating margin, if not offset by a sustained rise in steel costs, which have been on the rise lately.
Cascade has a solid balance sheet, with good working capital and long-term debt representing less than 20% of total capital. Although the dividend payout had been cut every year since 2007, it has been increased consecutively in the most recent two quarters; though the shares still yield less than 1%, the increases may reflect management’s confidence in future results.
All things considered, Cascade is not the most attractive investment at this time. Given the company’s highly cyclical nature and its heavy exposure to the relatively slow-growing American and European economies, its earnings are unlikely to post exceptional gains in the next few years. Although momentum investors may find some appeal in the company’s potentially lucrative stake in emerging markets, and the stock’s more-than-270% jump since 2009, they should remain wary of the stock’s high degree of volatility and frothy current valuation.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.