2023-05-18 17:45:32 ET
Summary
- Although Mayville missed on the bottom line, sales came in ahead of expectations.
- Sales powered ahead due to strong momentum in the military, Powersports & commercial vehicle segments.
- Mayville has multiple levers to protect profitability if demand contracts, but the jury is still out on whether this would keep shares elevated.
Intro
Mayville Engineering Company (MEC) is an American company that operates in the metal fabrication industry across a whole host of end markets (commercial vehicle, construction & access, Powersports, agricultural & military). The company announced its fiscal 2023- Q1 numbers at the beginning of May where it missed its bottom-line estimate by $0.08 per share (eps of $0.12 announced) although sales surprised to the upside ($142.65 million).
Although shares briefly traded down on the news, Mayville stock recovered quickly as there was a lot to like in Mayville's earnings report once properly digested. In fact, when one extracted the temporary negative impact of the extra costs associated with the Hazel Park manufacturing facility, normalized adjusted EBITDA actually increased in the quarter. Therefore, it became evident why investors stepped in to buy the stock aggressively under $10 a share (present share price now comes in at $12.19).
The theme throughout the earnings call (from the CEO) in particular was that although market conditions may at times be unfavorable in certain markets, the company will continue to focus on areas where it has control. This means the value will be continued to be added on the front end, whether this is through synergies from upcoming acquisitions or through the expansion of the company's in-house fabrication capabilities. From a customer demand standpoint, the CEO gave solid guidance on how he believes each end-market will play itself out in 2023.
The clear front-runner in terms of its size & growth profile is the Powersports market, where growth is expected to continue this year due to favorable market conditions. The two smallest markets in terms of revenue (Military & Commercial vehicles) continue to grow aggressively (66% & 16% rolling quarter growth in Q1) but the CEO seemed cautious with respect to growth in these segments beyond the middle of fiscal 2023.
Dealing With A Potential Pullback In Demand
Suffice it to say, if growth were to soften in multiple markets later this year, management pointed to how it could maintain its margins somewhat by disposing of the premium labor it is currently contracting. This would be made possible due to the sizable amount of temporary workers on Mayville's books at this present moment in time. If demand were to dry up, Mayville could swiftly reduce these costs in order to protect the income statement.
Another cost-cutting or efficiency-improving initiative that is more constant in nature is the company's MBX program and its ongoing execution, as we see below. MBX is all about continuous improvement in both Mayville's operating & commercial activities. Management seems to know here that small (even minuscule) improvements over time and at scale can result in significant value creation over the long term. Moreover, documentation of progress is crucial, and this in turn should get the 'buy-in' from Mayville's employees.
Mayville MBX Program (Seeking Alpha)
Technical Chart
When we go to Mayville's technical chart, however, we see that although shares have bounced pretty aggressively over recent sessions this month (May-2023), the intermediate term remains down (confirmed by the triple crossover of the 4,9 & 18-week moving averages). Furthermore, overhead resistance (Depicted by the blue multi-year trend line) and the large trading range Mayville has undergone in recent years (elevated volatility) demonstrate that the following two areas should be watched closely in upcoming weeks to ensure any potential intermediate down-trend does not gain traction.
MEC Intermediate Technicals (Stockcharts.com)
Interest Rates
'Construction & Access' is Mayville's largest market, reporting almost 20% of company-wide sales in the most recent first quarter. The segment's sales however declined by more than 10% in Q1 as high interest rates continued to take their toll on the residential property market in the US. Rising mortgage rates continue to result in fewer housing construction starts, which is obviously affecting Mayville's sales volume in this market.
Given the size of this market, stability will be needed here going forward, especially if expected growth rates from the other markets do not come in as envisioned. Furthermore, $1.7 million of net interest expense was paid from an operating profit tally of $4.7 million in the first quarter. This means the interest coverage ratio (2.76) is falling, which means that less EBIT has been dropping to the bottom line, which is not a trend that bulls will want to continue.
Forward-Looking EPS Revisions
Furthermore, if we look at Mayville's earnings expectations for upcoming quarters, we see that EPS revisions continue to get dialed down, which is a worrying sign. The current $0.19 a share estimate for Q2 for example has lost 35%+ of its value over the past 30 days alone. Q3's EPS estimate is down 11% over the same timeframe. Suffice it to say, although Mayville continues to trade with a very attractive valuation , the lower these estimates go, the higher the company's forward earnings multiples will rise (less perceived value). We acknowledge that Mayville is trading with a very keen forward sales multiple of 0.44 and a forward book multiple of 1.07. These multiples are below the company's 5-year averages and significantly below what the sector has to offer (P/S of 1.30 & P/B of 2.43). Valuation would look even better, however, if we could see the company's earnings projections stabilize somewhat in the upcoming weeks. This would certainly enhance Mayville's investment case going forward.
Mayville EPS Revisions (Seeking Alpha)
Conclusion
Although Mayville's Powersports, commercial vehicles, and military markets remain strong, we would not be interested in this play until we see a convincing break-out above that down cycle intermediate trend-line ($15.50 to $16 a share approximately). We look forward to continued coverage.
For further details see:
Mayville Engineering: Momentum Post Q1 Earnings Print Needs To Continue