MLR - Miller Industries Looks Poised For An Upward Movement

2023-04-26 18:17:39 ET

Summary

• Healthy demand has led to increased backlog levels.
• Improvements in supply chain constraints and price hikes should benefit both revenues and margins in 2023.
• The stock is currently undervalued.

Miller Industries ( MLR ) is a leading manufacturer of towing and recovery equipment with ten separate brands under its wing. The company is renowned for its diverse range of top-notch products, including wreckers, car carriers, and trailer bodies. In fact, MLR's unwavering commitment to quality has earned them unmatched loyalty from their distributors, with over 90% of them exclusively offering MLR's products and shunning competitors. This unwavering support from distributors, combined with MLR's unwavering focus on producing cutting-edge equipment, gives them a competitive edge in the market.

Despite facing supply chain constraints that resulted in a sequential decline in net sales over the past few quarters, Miller Industries has shown resilience and adaptability in navigating these challenges. In the fourth quarter of 2022, MLR's efforts to mitigate supply chain constraints paid off, resulting in impressive 10% sequential revenue growth. Overall, MLR's net sales for 2022 increased by a remarkable 18.3% year-over-year, reaching $848.5 million. This growth can be attributed to strategic pricing actions and improvements in the supply chain in the latter half of the fiscal year.

MLR has also been proactive in managing its profitability. While gross margins remained stable year-over-year at 9.7%, the company's operating margin improved by 20 basis points to 3.5% in 2022. This improvement can be attributed to MLR's diligent efforts in addressing supply chain constraints and implementing effective pricing actions. To enhance the stability and flexibility of its supply chain, MLR has taken several measures. For instance, the company has partnered with new suppliers to supplement the availability of hard-to-find parts since the beginning of 2022. Furthermore, MLR has enhanced its engineering redesign capabilities, enabling it to modify existing parts and retrofit them to meet specific needs instead of waiting for unavailable parts or those with extended lead times. These steps have helped MLR optimize its deliveries and ensure a smooth flow of production.

As we look ahead to 2023, MLR is poised for strong revenue growth due to a record-level backlog fueled by increasing demand for its products. To meet this demand, the company is strategically investing its capital to maintain healthy inventory levels and fulfill its order backlog, allowing for accelerated revenue recognition. MLR's commitment to efficient inventory management is evident, with inventories at the end of 2022 reaching $153.7 million, compared to $114.9 million in 2021 and $144.4 million in September 2022. Furthermore, MLR is expected to benefit from the anticipated price increase in 2023, which is a regularly scheduled occurrence. Management anticipates revenues to reach $1 billion in 2023, which I believe is reasonable given the healthy backlog levels, improving supply chain constraints, and 2023 price hikes. On the margin front, I am optimistic about MLR's prospects. The improvement in supply chain constraints, along with a moderation in inflationary cost pressures and pricing actions, is expected to positively impact the company's operating margins. These measures are likely to result in improved profitability and margin expansion, providing a favorable outlook for MLR's overall financial performance in 2023. In conclusion, I am optimistic about Miller Industries' revenue and margin growth prospects for 2023, given the robust backlog levels, favorable supply chain outlook, and pricing actions.

Capital Allocation

In recent years, Miller Industries has been committed to creating value for its shareholders while investing in key areas of its business. Through a strategic approach, MLR has focused on three core areas: productivity, capacity expansion, and the health and safety of its employees. Since 2016, MLR has returned approximately $55 million to its shareholders in the form of dividends, demonstrating its commitment to shareholder value. Additionally, the company has reinvested $136 million in capital expenditures to drive growth and operational improvements. Notably, 15% of the CapEx has been allocated towards automation and productivity enhancements, including the establishment of a new state-of-the-art fabrication facility in Greenville that produces steel parts, further strengthening the company's supply chain.

Furthermore, MLR has allocated approximately 60% of its CapEx towards capacity expansion projects. For instance, the acquisition of a small facility in Ooltewah, Tennessee, has helped enhance the production of the company's small carrier units, contributing to improved operational efficiency and increased output. MLR has also prioritized the health and safety of its employees, with approximately 12% of its CapEx invested in projects aimed at creating a safe working environment. This includes measures such as closing shipping docks to eliminate employee exposure to extreme weather conditions, showcasing the company's commitment to employee welfare. In addition to these investments, MLR has also allocated over $10 million towards technology solutions, such as the recent implementation of ERP software, to enhance its operational capabilities and drive efficiencies. Looking ahead, MLR plans to continue its strategic investments in these core areas to support its growth and operational excellence in the coming years.

Valuation

Despite facing challenges from supply chain constraints and inflationary cost pressures that have impacted both the top and bottom lines, Miller Industries' stock price has been on the rise in the last six-seven months, showing the company's successful efforts in managing these challenges. While the stock price dipped to $21.29 in September 2022, it has shown a positive trend since then.

From a valuation perspective, Miller Industries' current price-to-earnings (P/E) ratio based on its 2022 EPS of $1.78 is 18.64x, which is lower than the P/E ratio of 23.37x based on its 2021 EPS of $1.42. This suggests that the stock is currently trading at a more attractive valuation compared to the previous year. Furthermore, when comparing Miller Industries with three similar companies, the P/E ratios of these companies ranged from 14.90x to 33.87x, indicating that Miller Industries' P/E ratio is relatively lower and potentially undervalued, except for the Manitowoc company. Additionally, when considering the enterprise value-to-EBITDA (EV/EBITDA) ratio, another commonly used valuation metric, Miller Industries' ratio falls within a favorable range. The EV/EBITDA ratios of the three similar companies ranged from 6.51x to 21.15x, with only the Manitowoc Company having a lower ratio compared to Miller Industries.

Conclusion

In summary, I believe the stock has the potential to move in an upward direction as the supply chain challenges have improved and inflation is moderating. The company is efficiently handling these challenges by managing its inventory levels and taking price hikes. This should improve both revenues and margins in 2023 and help the company achieve its $1 billion target. Overall, I am positive about the company and have a buy rating on the stock.

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