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We wrote about Miller Industries (NYSE:MLR) in August of last year when we stated that the company was close to an intermediate bottom. The reasons behind our bullishness were improving earnings, sound decision-making by management to alleviate supply-chain bottlenecks and improving cash-flow trends. Another strong reason behind our bullish stance was the imminent crossover of the weekly MACD technical indicator at the time. These indicators are particularly noteworthy on longer term charts due to the duality of the indicator as well as the sheer amount of information that gets digested on long-term charts.
However, shares are down almost 10% since we penned that piece which means we were well out on our timing here. We now though have our weekly crossover and it is good to see that shares successfully tested support just last month in December. Therefore, to ascertain whether a strong long-term buying opportunity has finally presented itself in Miller, we go to the company's profitability, how the dividend stacks up and the current valuation. Encouraging trends across all three of these areas would definitely stack the odds in favor of a pending up-move in the works here. Let's get to it.
In the recent third quarter, net sales came in at $164.7 million which was a $3.7 million decline over the same period of 12 months prior. The decline was more pronounced over a sequential basis as sales declined well over $15 million from the second quarter. Given though that Miller continues to grapple with both inflationary and supply chain pressures, the market may have fully priced in these headwinds at this stage (hence, the recent bottom on the technical chart).
CEO Jeff Badgley spoke to this effect on the recent earnings call when he pointed out that due to persistent supply-chain bottlenecks, fulfilling elevated demand was simply not possible in the present environment. Management has been able to pivot somewhat by raising prices, but the financials will not see the full benefit of higher sales prices (due to honoring existing contracts) for some time to come.
As we move further down the income statement, we see that gross margin actually increased in the third quarter due to operational enhancement. Given though that Miller is continuing to invest aggressively through this cycle, SG&A costs increased by close to $3 million in Q3 due to staff & ERP initiatives. Furthermore, due to higher interest expense in the quarter, among others, net profit slipped to $3.8 million for the third quarter.
The issue here though with Miller is that the company is still making a healthy profit and this is key. This enables the reinvestment back into the firm to continue unabated. Net profit, for example, over the past four quarters comes in at around $26 million which in turn generated $11 million of free cash-flow. Considering the track-record of the firm, we would be backing the firm to come good with its recent investments. Why? Well, just look at the company's long-term record. Sales have risen by close to 9% on average per year over the past decade which has resulted in strong growth in the dividend as well as earnings.
That growth has all come from internal R&D and product development which means the firm is well used to providing additional value to its customers when the opportunity arises. This is the real value within the firm in that growth has always followed the elevated value it has put into the marketplace. If the people responsible have repeatedly brought it before, they sure can do it again. Therefore, from a future earnings standpoint, it would take a brave man not to back Miller improving its current returns by getting its ROE back up close to 13% which is its 5-year average. Miller's present ROE is just over 9%.
From a dividend standpoint, free cash-flow still covered the $8 million dividend payments over the past four quarters which is an encouraging sign. We state this because at the end of Q3, cash & cash equivalents topped $50 million and shareholder equity came in at $290 million. Given the current environment, it was obvious to see inventories increase to $109 million but this was compensated in one way by the drop-off in receivables to $131 million. Suffice it to say, we do not see any real risk to the dividend because there is no real debt to speak of on the balance sheet and management has been prudent in how it has managed capital.
Speaking of equity, this is where the value should be seen in Miller Industries at present. Why? Well, given what was said earlier in terms of internal R&D (to the absence of acquisitions) providing the growth path up until now, there are no real intangible assets on the balance sheet to speak of. Goodwill & intangibles are normally the first line-items to be written down in value when tough times come. Miller's assets are predominately made up of cash, receivables, inventory & property and plant & equipment. This means the current book multiple of 1.31 definitely looks on the low side when compared to yesteryear. We would expect some type of a reversion to the mean here before long.
Therefore, to sum up, Miller Industries' profitability at present may be lower than what we are accustomed to, but the market may finally be pricing in better times here. Customer demand is buoyant and the company looks to be in solid shape despite the prevalent inflationary and supply chain headwinds marring this sector at present. A close above the $34.50 mark would be a strong sign that the bottom is in here. We look forward to continued coverage.
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Elevation Code's blueprint is simple. To relentlessly be on the hunt for attractive setups through value plays trading under intrinsic value. To constantly put ourselves in positions where we have limited downside but yet significant upside always remains the objective of the portfolio.
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