Shares of Milacron Holdings Corp.
(MCRN - Free Report
) have slumped 35% year to date compared with the industry’s decline of 30%. The decline can be attributed to multiple headwinds plaguing the company.
What’s Pulling the Stock Down?
Steel is the primary raw material input for the Advanced Plastic Processing Technologies (“APPT”) and Melt Delivery and Control Systems (“MDCS”) segments. Consequently, the imposition of tariffs on steel has led to raw material cost inflation and impacted Milacron’s margins.
The tariffs impacted the buying behavior of customers in North America as well, affecting Milacron’s order flow. Notably, new orders declined 16% year over year to $270 million in third-quarter 2018. Further, the softening in the MDCS segment, which commenced in August, particularly in China is yet to return to prior levels. Year to date, the company has witnessed a drop of 5% in orders owing to a decline in the equipment business in Europe and North America, fall in hot runner business in China and the impact of product line deselection within the APPT segment, partially offset by an increase in global fluids business. Backlog at third-quarter end was also down to $263 million at third-quarter end compared with $294 million in the prior year.
Milacron now projects sales growth at 2% for 2018, lower than the previous sales growth guidance range of 2% to 4%. The company revised adjusted EBITDA guidance to $229-$231 million for the full year from the prior outlook of $237-$240 million. The company stated that the lowered guidance can primarily be attributed to impact of tariffs on industry orders.
The negativity around the stock can be gauged from the Zacks Consensus Estimate being revised downward by 20% in the past 90 days for current-quarter earnings. The Zacks Consensus Estimate for earnings for fiscal 2018 has moved south 4% over the past 90 days while the same for fiscal 2019 has gone down 6%.
Milacron’s Zacks Rank #4 (Sell) only reaffirms that it is plagued with several headwinds at the moment. The unfavorable rank implies that investors should get rid of the stock from their respective portfolios. In fact, stocks with a Zacks Rank #4 or 5 (Strong Sell) are likely to underperform the broader market over the next one to three months.
Will the Stock Rebound?
Nevertheless, the company remains optimistic regarding countering the headwind from tariffs by focusing on four areas comprising pricing actions, negotiations with existing vendors and making supply chain modifications. Milacron is also seeking exemptions on certain materials that are unavailable or are in short supply in the United States. Consequently, the company’s focus on these factors will help reduce the impact of tariffs.
Demand for a diverse range of finished plastic products is on the rise in many markets, including automotive, construction and consumer products. This is being escalated by global population growth, sustained urbanization, increased purchasing power and improved lifestyle in emerging markets. Given its strong global presence, Milacron is well positioned to capture a portion of this growth. The company has made significant investments in China and India, considering the projected growth rates of plastic business in these markets.
We believe these factors will benefit Milacron’s results going forward, and lift its share price. However, the stock will remain under pressure due to the abovementioned headwinds for the time being.
Stocks to Consider
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