Modine Manufacturing: A Contrarian Industrial Play Looking to Rally
A major investment focus of mine is searching for beaten-up contrarian stocks that could return above-average price appreciation. A candidate based on these criteria is small-cap Modine Manufacturing Co. (NYSE:MOD), which just traded at a 52-week low of $14.90 on September 18, down around 25% this year and 41% off its range high.
In my view, the sell-off in MOD stock is excessive to the point where aggressive investors with risk capital may want to take a closer look.
Modine has been around for just over a century. The company’s business is not going to jump out at you, as Modine manufactures heat transfer thermal management solutions for numerous applications and markets.
Areas that use the solutions include the Automotive, Building HVAC, Coils, Engines, Off-Highway, Power Sports, Testing Services, Transit Bus, and Truck & Specialty Vehicle markets.
Not exactly exciting stuff.
MOD stock may also be pressured by the tariff risk as the company has facilities in North America, South America, Europe, Asia, and Africa.
Add in the fact that some imported steel and aluminum is being slammed with 25% tariffs and you’ll understand why Modine may have been retrenching.
My view is that nothing is permanent; MOD stock will likely rally on the oversold selling.
On the Modine stock chart, MOD stock looks bearish. It failed to hold at $17.00 and is currently searching for support at $14.90. Failure to hold could see Modine stock decline further toward the $12.00 level, last traded at in April 2017.
The risk-to-reward scenario for Modine stock looks favorable.
Chart courtesy of StockCharts.com
The Contrarian Bull Case for MOD Stock
The revenue picture shows Modine growing its revenues in three of the last four fiscal years (ending in March) including the past two fiscal years.
|Fiscal Year||Revenue ($ Billions)||Growth|
(Source: “Modine Manufacturing Co.,” MarketWatch, last accessed September 28, 2018.)
The positive revenue growth for Modine is expected to continue, albeit at a lower rate.
Revenues are estimated to increase by 9.2% to $2.3 billion in FY19 followed by 4.3% to $2.39 billion and as high as $2.56 billion in FY20. (Source: “Modine Manufacturing Company (MOD),” Yahoo! Finance, last accessed September 28, 2018.)
Modine reported generally accepted accounting principles (GAAP) earnings in four of the past five fiscal years except FY16.
|Fiscal Year||GAAP Diluted EPS|
(Source: MarketWatch, op cit.)
Adjusted earnings are predicted to rise to $1.67 per diluted share in FY19 versus $1.54 per diluted share in FY18 and rise to $1.96 per diluted share in FY20. (Source: Yahoo! Finance, op cit.)
Modine is carrying more debt than what I would like to see but I’m encouraged by the positive free cash flow in four of the past five fiscal years.
|Fiscal Year||Free Cash Flow ($ Millions)|
(Source: MarketWatch, op cit.)
While Modine stock has some work to do to improve the growth rates, the level of the sell-off is not warranted in my view.
MOD stock is trading at an attractive 7.80 times its consensus FY20 EPS versus 29 times the trailing multiple.
Insiders at Modine bought 442,314 shares over 28 transactions during the past six months while only 20,000 shares were sold. I view this as a bullish signal. (Source: Yahoo! Finance, op cit.)