Diversifying Into Data Centers And Infrastructure May Mitigate Demand Weakness, Though Margins Under Pressure

Key Takeaways

• Expansion into high-value, less cyclical markets aims to diversify revenue streams and enhance stability, potentially boosting future margins.
  
• Strong cash flow enables debt reduction and share buybacks, improving financial leverage and potentially increasing per-share earnings.
  
• Declines in key markets and lower utilization are impacting revenue and margins, while a reliance on legal settlements raises questions about earnings stability.

Catalysts

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

• Expected recovery in demand during the second half of 2025, driven by new projects in backlog and discussions with both new and current customers, is anticipated to gradually recover revenue and improve overhead absorption rates, positively impacting revenue growth and margins.
  
• Business development into high-value, less cyclical markets like industrial infrastructure investments and data centers is likely to increase the revenue base, diversifying end markets and reducing cyclicality, which could enhance revenue stability and margins.
  
• Strong free cash flow generation supports debt reduction and share repurchase strategies, which synergistically improve the company's financial leverage and per-share earnings, potentially increasing EPS through reduced debt expenses and share count.
  
• Continuous operational improvements and strategic MBX initiatives, including targeted cost reduction and strategic pricing, are expected to yield future margin benefits and operational efficiency, boosting net margins and contributing to long-term profitability.
  
• Potential M&A activity aimed at diversifying market exposure into high-growth, secular end markets positions the company for long-term growth, which could incrementally raise revenue and enhance future earnings growth.

Mayville Engineering Company Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Mayville Engineering Company's revenue will grow by 2.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 4.5% today to 2.3% in 3 years time.
• Analysts expect earnings to reach $14.6 million (and earnings per share of $0.68) by about March 2028, down from $26.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.8x on those 2028 earnings, up from 11.2x today. This future PE is greater than the current PE for the US Machinery industry at 21.4x.
• Analysts expect the number of shares outstanding to decline by 0.52% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.02%, as per the Simply Wall St company report.

Mayville Engineering Company Future Earnings Per Share Growth

Risks

• Softer demand in core vertical markets has resulted in an 18% year-over-year decline in revenue, impacting the company's top-line growth.
  
• The ongoing customer inventory destocking is contributing to lower utilization and reduced overhead absorption, negatively affecting net margins.
  
• While free cash flow generation remains strong, a significant portion came from a legal settlement, suggesting potential volatility in sustainable earnings.
  
• The company anticipates continued softness in demand across most end markets for the first half of 2025, posing a risk to further revenue and margin expansion.
  
• Key markets such as the powersports and agricultural sectors are expected to see ongoing declines due to factors like soft consumer demand and high interest rates, affecting revenue stability and growth.

Valuation

• The analysts have a consensus price target of $19.0 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 $621.3 million, earnings will come to $14.6 million, and it would be trading on a PE ratio of 32.8x, assuming you use a discount rate of 8.0%.
• Given the current share price of $14.23, the analyst price target of $19.0 is 25.1% 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.