Diversification Into EV Platforms And Data Centers Will Strengthen Future Prospects

Key Takeaways

• Cost rationalization and strategic project wins are set to enhance margins and revenue growth despite market softness.
  
• Diversification into electric vehicle platforms and data centers promises significant long-term revenue growth and improved capital allocation strategies.
  
• Decline in sales and increased order cancellations are driven by softening demand and high interest rates, with cost-cutting measures potentially limiting future scalability.

Catalysts

Engages in the production, design, prototyping and tooling, fabrication, aluminum extrusion, coating, and assembling of aftermarket components in the United States.

• The company has implemented cost rationalization initiatives, including a 12% reduction in workforce and the closure of the Wautoma facility, which are expected to result in significant annualized cost savings of $1 million to $3 million. This should improve net margins and help increase EBITDA margins by 50 basis points.
  
• Mayville is focusing on new project wins across its markets, including significant bookings of approximately $80 million in new projects this year. These initiatives are likely to enhance revenue growth despite overall market softness.
  
• The company expects a recovery in demand beginning in the first half of 2025, driven by expected declines in customer equipment financing rates. This could bolster revenue and earnings as consumer discretionary spending improves.
  
• A strategic focus on diversifying end markets and expanding into battery electric vehicle platforms and data centers is anticipated to generate significant revenue growth from 2026 onward, impacting long-term earnings positively.
  
• Strong free cash flow generation, which has been used to reduce net leverage, positions Mayville well for future capital allocation strategies like share repurchases and accretive acquisitions, potentially boosting earnings per share.

Mayville Engineering Company Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Mayville Engineering Company's revenue will decrease by -0.6% annually over the next 3 years.
• Analysts are assuming Mayville Engineering Company's profit margins will remain the same at 2.0% over the next 3 years.
• Analysts expect earnings to reach $12.1 million (and earnings per share of $0.56) by about January 2028, down from $12.2 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 45.6x on those 2028 earnings, up from 26.5x today. This future PE is greater than the current PE for the US Machinery industry at 23.3x.
• Analysts expect the number of shares outstanding to grow by 1.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.71%, as per the Simply Wall St company report.

Mayville Engineering Company Future Earnings Per Share Growth

Risks

• The third quarter showed a marked deceleration in customer order activity and softening demand across several end markets, leading to a significant decline in net sales by more than 14% year-over-year, which could continue to impact revenue if not reversed.
  
• The company has faced a 31.1% year-over-year decrease in revenues from the agricultural market, which is projected to have a long recovery cycle that may not improve in 2025, thus potentially affecting future revenue streams.
  
• Despite strategic cost-saving measures, the company is experiencing increased order cancellations and production cuts in key markets like commercial vehicles, powersports, and construction, potentially affecting net margins and EBITDA margin.
  
• The company has introduced cost rationalization initiatives, including facility shutdowns and labor reductions, which may save costs in the short term but could limit the company’s ability to quickly scale back up when demand returns, potentially affecting earnings stability.
  
• Elevated interest rates and excessive dealer inventory levels in consumer markets are curbing demand, and while the company anticipates a rebound in customer financing rates, any delay in rate normalization may prolong revenue recovery.

Valuation

• The analysts have a consensus price target of $21.0 for Mayville Engineering Company based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $598.7 million, earnings will come to $12.1 million, and it would be trading on a PE ratio of 45.6x, assuming you use a discount rate of 7.7%.
• Given the current share price of $15.71, the analyst's price target of $21.0 is 25.2% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.