Mayville Engineering: Engineering Growth

I have never covered shares of Mayville Engineering Company, Inc. (NYSE:MEC), yet a relative large deal, for the size of the firm, warrants the establishment of an investment thesis. I believe that Mayville is an interesting business, with some margin work to do. It has just announced an interesting acquisition, so it warrants a place on my watch list.

Engineering - Prototyping

Mayville Engineering is a vertically integrated provider of custom prototyping, design and fabrication services. Founded in 1945, the company operates some 20 facilities with more than 2,000 workers.

Its services are typically used by supplier of engineered components and OEMs, in sectors like commercial vehicles, power sports, construction, agriculture and the military. The nature of the business model introduces some lumpiness in sales as customer concentration is on the higher end. John Deere and Paccar each made up about a sixth of sales in 2022, with other large accounts by Volvo, Honda, Harley-Davidson and Navistar, among others.

The company went public at $17 per share in 2019, as shares fell to the mid-single digits amidst the outbreak of the pandemic. Shares recovered to the $20 mark in 2021, but fell back all the way to $6 in the fall of last year, before having recovered to $15 per share now.

The company posted a solid 18% increase in 2022 sales to $539 million. Commercial vehicles are responsible for about 40% of sales, with about 20% of sales derived from construction & access industries, 15% from power sports and the remainder from all other subsegments.

The Numbers

Amidst volatile share price developments since the public offering, Mayville has seen solid top line sales developments in 2022, although an 18% increase in sales does not say that much in such an inflationary environment.

In 2022 the company posted a GAAP operating profit of $25 million, although aided by gains of $4 million on contracts. Net earnings of nearly $19 million, or $0.91 per share, were aided by the gain on contracts, but on the other hand was a headwind from absorption of costs of the new Hazel facility which was not in use yet. Net debt of $75 million looked pretty manageable, as the company posted adjusted EBITDA of around $60 million.

With 20 million shares trading at $15 per share, the valuation looked reasonable with realistic earnings trending around a dollar per share. This comes as the company outlined a reasonably solid guidance for 2023, seeing sales between $540 and $580 million, with adjusted EBITDA set to improve to $62-$71 million.

In May, Mayville announced a solid first quarter earnings report. Sales rose by nearly 5% to $142 million and change. GAAP earnings fell from $0.19 per share to $0.12 per share which includes a ten cent headwind from the Hazel park production ramp-up. Net debt ticked up a bit to $84 million, but with full year capital spending been rather subdued this year, no real net capital investments are seen this year.

In June, the company announced a rather interesting bolt-on deal. Mayville has reached a $96 million deal to acquire Mid-States Aluminum Corp, all while the own enterprise valuation approached $400 million, making it a sizable deal for the size of the company.

MSA is a vertically integrated manufacturer of custom aluminum extrusions and fabrication. The 250 workers of the business generate a massive $86 million in sales, which reveals that Mayville is paying roughly 1 times sales, a premium to its own valuation at around 0.7 times sales. There are good reasons for that as a $16 million EBITDA number suggests EBITDA margins of around 20%, nearly twice the EBITDA margins reported by Mayville.

Pro forma Mayville will increase to about $80 million, or just above that, as net debt will jump to $180 million, for quite reasonable leverage ratios. Based on the lower EBITDA multiple and still manageable leverage situation, shares of Mayville jumped about a dollar in response to the deal announcement, which quite frankly looks fair.

And Now?

The reality is that shares of Mayville Engineering Company, Inc. have shown quite some volatility, in part because quarterly earnings are quite lumpy amidst rather low margins. Hopefully the deal with MSA can improve this a bit, although it will add some leverage as well.

Given these moving trends and the recent share price recovery, I am not happy to chase the shares right here, right now. That being said, the company and the deal look interesting enough to maintain coverage on the name, although I would only consider a potential investment at lower levels here in Mayville Engineering Company, Inc.

If you like to see more ideas, please subscribe to the premium service "Value in Corporate Events" here and try the free trial. In this service we cover major earnings events, M&A, IPOs and other significant corporate events with actionable ideas. Furthermore, we provide coverage of situations and names on request!