Milacron reports increased revenue, but analyst deems pace of recovery ‘erratic’

As plastics processors invest in capital equipment to expand production capacity, replace older equipment or take advantage of new technology, Milacron’s revenue has “picked up,” noted Stephen Simpson, CFA at Seeking Alpha, in his analysis of the latest report from Milacron (Cincinnati, OH). Seeking Alpha (New York, NY) provides market insights and financial analysis.

“With better results and higher multiples across the machinery space, Milacron’s shares have done okay since my last update in May 2016,” said Simpson in his June 22 analysis (“Milacron Delivering, But The Road Is Getting a Little Rockier”). “Though the shares have sold off about 10% recently, they’ve still generated a double-digit return over the past year despite rising input costs offsetting a lot of the progress the company has made with operating expenses. Although I think Milacron’s multiple should have room to improve from here, I’m a little more cautious on the near-term outlook for machinery investment, particularly with trade protectionism bubbling up,” said Simpson.

Milacron has continued to deliver better-than-expected quarters, with revenue exceeding sell-side expectations for five straight quarters. Organic revenue growth “perked up” from 1% in the second quarter of 2017 to 6% in the third quarter and 9% in the fourth quarter, before slowing to 3% in Q1 2018. “The latter was due at least in part to the company’s decision to walk away from some capital equipment business in the auto sector; the company’s largest end-markets continue to do reasonably well,” said Simpson.

Despite the good news, Simpson pointed out that revenue compensation has been “erratic,” with two main revenue drivers “in play for Milacron to varying degrees—demand for molding equipment (the APPT segment) to replace an aging installed base and ongoing conversion from cold runners to hot runners” (the MDCS segment which includes hot runners). 

The MDCS segment saw double-digit organic growth in the second and third quarters of 2017 before a slowdown partly tied to order timing in the fourth quarter and a rebound to 9% growth in the first quarter of this year (against nearly double-digit year-ago comparables). “APPT revenue growth has likewise been all over the place, with growth decelerating sharply from 16% in the fourth quarter of 2017 to flat in the first quarter [of 2018],” commented Simpson.

Simpson noted that Milacron’s margin improvement efforts have had mixed results, as higher input costs have weighed on gross margin, with significant gross margin pressure in Q2 2017 through Q4 2017 before a “modest improvement” in Q1 of 2018 driven by a “more concerted effort to manage the mix” (by walking away from lower-margin business). 

Milacron’s cost reduction program, which is about 75% complete, has paid dividends, as EBITDA margins have remained relatively stable with a slight upward bias, and free cash flow generation has improved a bit, Simpson said.

Simpson’s primary concern involves “slowing demand for capital equipment” in spite of the fact that orders “remained healthy in the first quarter, and machine tool orders remain strong,” even given that capital equipment manufacturers are making “cautious statements.” He added that he’s “taking a little more conservative position at this point in the cycle.”

Looking at the long term, however, Simpson believes there are opportunities for Milacron to grow, particularly since the automotive market accounts for about one-quarter of Milacron’s business (and one-third of the more profitable MDCS and Fluid Technologies businesses). The continued trend to substitute metal parts with plastic to reduce weight and cost will also benefit Milacron, as it is projected that 18% of cars will be made of plastic in 2020. 

Simpson also believes that there’s “more room for increased penetration of hot runners in plastic molding operations” to reduce plastic waste and clean-up labor costs, as well as achieve faster production cycle times.

“I also believe Milacron has opportunities to grow through M&A,” stated Simpson in his analysis. “The company still has too much debt on the balance sheet, but I believe the company could start thinking about meaningful M&A in a year or two. Although plastic molding equipment is a very fragmented market, I’m less interested in seeing Milacron act as a consolidator and more interested in seeing the company acquire more consumables/aftermarket components and technology-driven products,” said Simpson.