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Rising Demand, Cost Reduction Aid Milacron Amid Inflation

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On Dec 27, we issued an updated research report on Milacron Holdings Corp. (MCRN - Free Report) . The company is poised to gain from the rising demand for plastics in many markets and introduction of new products. However, input cost inflation due to the impact of tariffs is expected to affect its near-term results.
 
Let’s illustrate these growth factors in detail.
 
Two-Pronged Impact of Tariffs on Orders & Costs
 
In third-quarter 2018, Milacron’s orders declined 16% year over year to $270 million, as tariffs impacted the buying behavior of customers in North America. Notably, the company witnessed a 5% drop in orders year to date, owing to a slump in the equipment business in Europe and North America, along with the hot runner business in China, coupled with the impact of product line deselection within the Advanced Plastic Processing Technologies (APPT) segment, partially offset by growth of the global fluids business. Backlog at third-quarter end was down to $263 million from $294 million recorded a year ago.
 
Milacron now projects sales growth in 2018 at 2%, lower than the previous guided range of 2-4%. The company revised its adjusted EBITDA guidance for the full year to $229-$231 million from the prior projection of $237-$240 million. The company stated that the lowered guidance can primarily be attributed to the impact of tariffs on industry orders.
 
The Zacks Consensus Estimate for revenues is at $1.25 billion for fiscal 2018, reflecting year-over-year growth of 1.58%. The Zacks Consensus Estimate for earnings per share is pegged at $1.67, projecting a year-over-year decline of 1.18%.
 
The imposition of tariffs on steel has also led to input cost inflation for Milacron. The company, however, remains optimistic to offset the headwind from tariffs by focusing on pricing actions, negotiations with existing vendors and making supply chain modifications. Milacron is seeking exemptions on certain materials that are unavailable or are in short supply in the United States.
 
Rising Demand for Plastic to Sustain Results
 
Demand for a diverse range of finished plastic products has been 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 rate of plastic business in these markets. Milacron plans to continue expanding manufacturing capabilities, while also improving the company’s technical, marketing and sales efforts.
 
Cost-Reduction Initiatives to Aid Growth
 
Milacron expects that its profitability will be supported by revenue growth and margin expansion in the near term. The company has undertaken a number of organizational redesign and cost-reduction initiatives over the past three years. The key actions include realigning the overall cost structure, consolidating sales offices and call centers, along with optimizing its manufacturing footprint. Milacron’s organizational redesign and cost-reduction efforts are expected to yield approximately $35 million of annual run-rate cost savings by the end of 2018.
 
Share Price Performance
 
 
Milacron has underperformed its industry over the past year. The stock has plunged around 38% compared with 33% decline recorded by the industry during the same time frame.
 
Zacks Rank & Stocks to Consider
 
Milacron currently carries a Zacks Rank #3 (Hold).
 
Some better-ranked stocks in the same sector are W.W. Grainger, Inc. (GWW - Free Report) , CECO Environmental Corp. (CECE - Free Report) and Northwest Pipe Company (NWPX - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
 
Grainger has a long-term earnings growth rate of 12.4%. The stock has gained around 19% in a year’s time.
 
CECO has a long-term earnings growth rate of 15%. Its shares have gained 27% in the past year.
 
Northwest Pipe has a long-term earnings growth rate of 10%. The company’s shares were up 18% during the past year.
 
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