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The logistics and warehouse automation space has certainly had its ups and downs over the last few years. While the pandemic significantly accelerated a lot of automation plans and gave what I believe will be a lasting boost to e-commerce, the reality is that many companies today are taking a more cautious stance on capex investment given the uncertainties in the larger economy. That has made life a little more difficult for Jungheinrich (OTC:JGHAF)(JUN3) shareholders, even though the company continues to execute.
It’s been a while since I’ve covered this German manufacturer of forklifts and other warehouse automation components, but the company has done fairly well since then. Revenue growth has tracked a few percentage points better than I’d expected and FCF generation has been better as well. What’s more, management has made some acquisitions that I think better position the company as a more significant supplier to future warehouse automation projects.
All of that has translated into decent share price performance – although Jungheinrich has lagged the S&P 500 since my last article, it has performed considerably better than peers/rivals like Kion (OTCPK:KIGRY)(KGX), Daifuku (OTCPK:DFKCY)(6383.T), and Cognex (CGNX) (a less apples-to-apples comparison, but still a company meaningfully leveraged to logistics/warehouse automation). While Jungheinrich isn’t going to be an easy stock for every reader to own/follow, I do think today’s valuation embeds a lot of skepticism, if not outright bearishness, relative to the longer-term opportunities in the company’s key markets.
A Healthy First Half, But A Slowdown Is Coming
Jungheinrich has posted pretty good results so far this year, including reported revenue growth of about 20% in the second quarter. Even adjusting for the benefit of a recent acquisition, 14% or so organic growth is not at all bad. Likewise, the company produced healthy 38% reported operating income growth (adjusted/organic would have been a bit higher) and margin expansion of 110bp (to 8.5%). Orders, too, have continued to grow, improving 18% as reported and about 10% in organic terms.
The bad news is that the good times are grinding to an end for the time being. Management’s most recent guidance for the full year calls for year-over-year order growth of 8% (or about 2% in organic terms) and revenue growth of 10% (or about 6% organic), with operating margins of around 8.2%.
I don’t think the idea of slowing demand, particularly in Europe (where Jungheinrich has historically generated more than 80% of its revenue), will take too many readers by surprise. Many companies have warned of slowing demand, particularly for capital equipment, and many companies have paused their capital expansion projects as they try to suss out the near-term direction for demand among their end-markets. Along those same lines, many companies in the factory automation space have pointed to slowing (or declining) orders, shrinking backlogs, and little-to-no visibility on customer demand trends over the next 6 to 12 months.
For what it’s worth, Jungheinrich has historically been pretty clear-eyed and sober with their guidance. Jungheinrich has generally been among the first in the space to point to softer demand trends and/or order uncertainty, and I’d describe as their history as “prudently conservative”, usually erring to the cautious or conservative, but not trying to sandbag numbers to set up easy comparisons.
Building Out The Offerings
One of the things that has impressed me about Jungheinrich is the company’s ability and willingness to expand beyond in its traditional core offerings without completely disrupting the operating model or overpaying to add to the growth profile.
In 2021 the company acquired Arculus, a Germany-based manufacturer of autonomous mobile robots, and the company has more recently moved to acquire Storage Solutions, a U.S.-based manufacturer of warehouse racking systems, and Magazino, a German manufacturer of mobile robotics systems.
Jungheinrich’s core strength remains in forklifts and similar warehouse trucks (pallet trucks, order pickers, reach trucks, et al), which it generally designs and develops in close partnership with customers like Aldi and Lidl, making its business stickier than you might otherwise expect. While Jungheinrich remains a EU-focused company, where it enjoys more than 20% share (trailing Kion), the company has been working to expand its capabilities elsewhere, and I think acquisitions like Storage Solutions can help boost the company’s presence in the U.S. market.
Beyond trucks the company has an established presence in other warehouse automation components, including racking and storage systems (including its proprietary PowerCube system), sorting systems, software, and the like. I really like the acquisitions of Arculus and Magazino, as I believe automated robot-based systems are going to be one of the more significant growth areas within warehouse / logistics automation, and Magazino in particular gives the company a little more leverage to opportunities in industrial markets (the Soto robotics system is designed to bring materials directly to assembly line).
The Outlook
Amazon‘s (AMZN) decision to slam the brakes on its warehouse expansion has had a significant impact on the overall sector, as well as more Amazon-dependent suppliers like Cognex, Kion, and Honeywell‘s (HON) Intelligrated. On the other hand, though, the industry estimates I’ve seen suggest that warehouse automation has still only reached around 20% and that may be overstating the “on the ground” reality as some of these surveys take a fairly broad view of what counts as “automation”. Moreover, expanding the company’s addressable markets (like offering more products that can be used within factories) only adds to the opportunities Jungheinrich can serve in the coming years.
On the positive side, I continue to expect further investments into e-commerce and automated logistics and fulfillment capabilities. For retailers it’s practically a matter of survival to minimize logistics costs while maximizing efficiency – customers don’t want to pay for shipping, they want the broadest assortments possible, and they want delivery as quickly as possible. For industrial and other manufacturing companies, automation can improve factory floor efficiency as well as reduce logistics and distribution costs, and companies (and investors) remain obsessed with turning over every rock possible that may boost operating margin and cash generation.
On the negative side, while the long-term trends for automation are positive, that upward curve is going to have plenty of up-and-down spikes in it. It’s not at all unusual for the market to punish capex spending during periods of uncertainty, and many industrial and retail companies have pulled back on capex/expansion investments in light of weakening economic indicators (PMI, et al) and uncertain demand trends.
I believe Jungheinrich can leverage these long-term trends in automation to outgrowth underlying industrial production and capex investment in the EU (and U.S.) to generate around 5% long-term annualized revenue growth. Should the company successfully expand its business in the U.S. in a more meaningful way and/or continue to expand into faster-growing opportunities like robotics and software, there could certainly be upside.
I’m expecting mid-to-high teens EBITDA margins over the next few years, though I think margin could be a bit pressured next year on weaker order/demand trends. Longer term, I have my doubts as to whether the company can do much better than 4% to 5% free cash flow margins – looking at comparables like Kion and other machinery companies suggests that may be as good at it gets unless the company meaningfully shifts its mix to higher-value products and services. Even so, that supports mid-to-high single-digit FCF growth.
Perhaps my estimates sound too conservative, but the market appears to be counting on even less. My fair value on a discounted cash flow approach is more than 15% above today’s price. Likewise the company’s forward EBITDA multiple is only about 4x – well below what would otherwise be normal for an industrial company with similar margins and returns (ROIC, et al). Perhaps I’m underestimating the magnitude of the upcoming downturn, but I don’t feel like Street expectations are very high at all here.
The Bottom Line
Jungheinrich may be a bit too far off the beaten path for some investors, but I see some value here. I am bullish on the long-term opportunities in logistics and warehouse automation, and I think there will be significant opportunities for the company in the years to come. I also think the current expectations embedded into the share price should prove to be beatable – maybe not over the next 12-18 months, but beyond that for years to come. As such, I think this is a name to consider for investors willing to take on the risk of buying in ahead of weaker near-term numbers for revenue and orders.
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