Mayville Engineering Company: The Firm Is Cheap But It Has Some Issues

Summary

  • Mayville Engineering Company has done well to grow its top line in recent years, but profitability has suffered some.
  • Fortunately for investors, cash flow continues to come in strong and the actual risk to the business appears fairly low.
  • Shares are also cheap right now, making it an appealing prospect.
  • Looking for a helping hand in the market? Members of Crude Value Insights get exclusive ideas and guidance to navigate any climate. Learn More »

The welder is welding steel plates

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Now more than at any point in human history, many of the industrial components and processes used by companies are incredibly complex. In the past, firms used to produce many of the components that they needed in house. But those days are long past. Today, contract manufacturing has become a significant industry that helps other industrial firms to focus on their core operations while hopefully keeping costs down. One interesting player in this space to consider is a company called Mayville Engineering Company (NYSE:MEC). Despite the business being hurt significantly by the COVID-19 pandemic, it does appear to be recovering and its long-term outlook does not look bad. Admittedly, the company does suffer some with bottom line performance. But even if the enterprise continues to generate the kind of cash flow that it has in recent years, then shares look awfully cheap.

A niche business

Mayville Engineering describes itself as a manufacturing company that offers a range of prototyping and tooling, production fabrication, coating, assembly, and aftermarket components. IT services a wide array of end market users like owners and manufacturers of commercial vehicles, construction an access equipment, power sports equipment, agricultural devices, and the military.

Although the company is quite small from a market capitalization perspective, it claims to be the largest fabricator in the country, coming in at more than twice the size of its next largest competitor. In addition to metal fabrication work, the company engages in metal stamping, tube bending and forming, robotic part formation, various types of welding and laser cutting, the application of custom coatings, and more. The business serves its customers through 19 different facilities located across the US, focused in seven key states. These particular properties account for about 2.7 million square feet of manufacturing capacity.

MEC revenue, net income, operating cash flow & ebitda*Created by Author

In the three years leading up to the COVID-19 pandemic, management succeeded in growing the enterprise at a nice clip. Between 2017 and 2019, revenue grew from $313.33 million to $519.70 million. It is worth noting that the vast majority of this growth took place because of the company's acquisition, in December of 2018, of Defiance Metal Products Co, but it did also achieve organic growth during this timeframe. But then, in 2020, pain hit. Revenue declined to $357.61 million. Fortunately for investors, that decline appears to be over. In the first nine months of the firm's 2021 fiscal year, revenue came in at $341.85 million. This represents an increase of 30.3% over the $262.26 million generated the same time one year earlier. If management's forecasts are correct, the company's sales should come in this year at between $450 million and $470 million. That still means that it has failed to achieve a full recovery from the pandemic, but that should come in due time.

In addition to recovering its core operations, the company is focusing on growth in other ways. For instance, just recently, it announced that it had reached an agreement to enter into a strategic partnership with an unnamed firm that will result in Mayville Engineering creating major key components for fitness equipment. The company expects this partnership to add significant revenue to its operations as early as next year, vaulting this unnamed customer into the roster of the company's top 10 customers that year. In order to make this transaction work, the company is spending between $35 million and $45 million on automation and other technologies and in the opening of a new manufacturing facility in Michigan. The company has received a $2.5 million incentive package from the state in order to help cover this cost. But most of it will come from cash flow generated by the enterprise. Outside of this particular partnership, the company has also announced the intention to expand one of its other facilities located in Arkansas. The costs associated with that have not been disclosed.

Although the general revenue trajectory of the company has been positive, the bottom line for the enterprise has been somewhat mixed. Over the past four years, the company has generated a net loss in two of the years. These were in 2019 and 2020. But at $4.75 million and $7.09 million, respectively, these losses are fairly small. More important has been cash flow. Between 2017 and 2020, operating cash flow moved in a very narrow range of between $30.80 million and $36.72 million. In 2020, operating cash flow was an impressive $36.52 million. EBITDA has looked a bit different. According to management, this metric grew from $30.19 million in 2017 to $54.70 million in 2019. But then, in 2020, it declined to $32.85 million.

MEC revenue, net income, operating cash flow & EBITDA and adjusted operating cash flow*Created by Author

For the current fiscal year, the business is showing signs of recovery. In addition to seeing its revenue rise, its net loss of $8.06 million from the first nine months of its 2020 fiscal year turned into a profit in the same time this year of $6.11 million. Operating cash flow did fall, declining from $19.29 million to $12.79 million. But if you adjust for changes in working capital, it would have risen from $22.22 million to $31.64 million. Finally, EBITDA so far this year has totaled $37.05 million. This is nearly double the $23.52 million generated during the same window of 2020. For the current fiscal year, management expects EBITDA to be between $46 million and $52 million. But this is net of about $4 million associated with the aforementioned strategic customer relationship the entity has recently struck. Adjusting for this, EBITDA should be around $53 million. Annualizing results from the first three quarters of the current fiscal year gives us a rough estimate for operating cash flow of $52 million.

Company Price / Operating Cash Flow EV / EBITDA
Mayville Engineering Company 5.8 6.7
Mueller Industries (MLI) 14.2 5.9
Crane Co. (CR) 13.5 9.6
Parker-Hannifin (PH) 17.7 14.0
EnPro Industries (NPO) 20.9 13.7
Standex International (SXI) 14.8

13.5

Using this data, we can effectively price the business. On a price to operating cash flow basis, shares of the firm are trading at a multiple of 5.8. Meanwhile, the EV to EBITDA multiple of the company is 6.7. To put this in perspective, I decided to compare the company to the five highest rated of its peers as defined by Seeking Alpha's Quant platform. On a price to operating cash flow basis, these companies range from a low of 13.5 to a high of 20.9. Of the group, Mayville Engineering is the cheapest. Using the EV to EBITDA approach generates a range of 5.9 to 14. In this case, only one of the companies is cheaper than our prospect.

Takeaway

At this moment, Mayville Engineering is an intriguing prospect. I am not a fan of the inconsistency when it comes to profitability. But I do like the stable cash flows the company has achieved over time. If this can continue and if recent investments being made to expand its footprint payoff, then this can be paired with the fact that its multiples are quite low to comprise an attractive value play for long term investors.

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This article was written by

Daniel Jones profile picture
23.32K Followers
Robust cash flow analyses of oil and gas companies

Daniel is currently the manager of Avaring Capital Advisors, LLC, a registered investment advisor that oversees one hedge fund, and he runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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