Tariff And Integration Risks Will Cut Margins Yet Kindle Recovery

Key Takeaways

• Integration challenges and execution risks from recent acquisitions could constrain profitability and cash flow despite entry into high-growth markets.
  
• Ongoing labor pressures, legacy market exposures, and heightened global competition threaten to offset operational gains and limit future margin expansion.
  
• Weakness in key markets, heavy customer concentration, higher leverage, trade policy uncertainty, and integration risks threaten revenue, margins, and cash flow stability.

Catalysts

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

• Although Mayville Engineering continues to benefit from growing reshoring trends and has successfully captured new business thanks to its U.S.-based manufacturing footprint, ongoing uncertainty regarding U.S. tariffs and global trade policy has made many OEM customers hesitant to commit to large-scale reshoring of steel fabrication-this could prolong softness in new project revenues and limit near-term sales acceleration.
  
• While the acquisition of Accu-Fab promises to diversify the company into high-growth end markets like data centers and critical power, integrating new operations and realizing synergies entails substantial non-recurring costs and execution risk, which may weigh on net margins and cap free cash flow in the early years of integration.
  
• Despite significant investments in automation and cost reduction that have delivered sequential EBITDA margin improvement, persistent labor shortages and elevated wage pressures in U.S. manufacturing threaten to erode these efficiency gains, with the company remaining especially vulnerable should labor market tightness intensify further, potentially constraining profit expansion.
  
• Even though MEC's strategy to reduce reliance on cyclical end markets is progressing-evidenced by new business wins in electrification, battery thermal management, and military applications-the company is still exposed to legacy powersports and agriculture customers, and a prolonged downturn or slow recovery within these sectors could continue to suppress overall revenue growth and delay the path to normalized earnings.
  
• Despite sector-wide momentum toward electrification and advanced manufacturing, the global adoption of Industry 4.0 technologies increases the risk of overcapacity and intensifies competition from international, lower-cost manufacturers able to invest aggressively in automation, which could pressure pricing and limit MEC's ability to protect or enhance net margins in the medium to long term.

Mayville Engineering Company Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Mayville Engineering Company compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Mayville Engineering Company's revenue will grow by 8.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 3.4% today to 2.9% in 3 years time.
• The bearish analysts expect earnings to reach $19.2 million (and earnings per share of $1.08) by about August 2028, up from $17.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 22.9x on those 2028 earnings, up from 16.0x today. This future PE is lower than the current PE for the US Machinery industry at 24.2x.
• Analysts expect the number of shares outstanding to decline by 1.58% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.81%, as per the Simply Wall St company report.

Mayville Engineering Company Future Earnings Per Share Growth

Risks

• Sustained weakness and ongoing destocking in core end markets, particularly commercial vehicles, agriculture, and powersports, is causing lower sales volumes and reduced fixed cost absorption, which is likely to continue to negatively impact revenues and compress margins in the near to medium term.
  
• Heavy client concentration in certain sectors makes the company vulnerable to order reductions or production pauses by a small number of key customers; recent evidence showed large customers reducing capacity and production days dramatically, representing a significant risk to revenue stability and future earnings.
  
• Mayville Engineering's recent acquisition of Accu-Fab increased pro forma net leverage from 1.4 times to 3.1 times EBITDA, raising medium-term balance sheet risk and potentially limiting future capital allocation flexibility or increasing interest expenses, both of which could reduce net income growth.
  
• The company is exposed to ongoing uncertainty in US and global trade policy, including tariffs and changes in the competitive landscape for steel and aluminum sourcing; delays and indecision from customers regarding reshoring and changing tariff structures restrict MEC's ability to effectively replace lost volume, impacting potential revenue growth.
  
• Execution risks remain with integration of recent acquisitions, large-scale cost-cutting programs, and footprint optimization initiatives; non-recurring integration expenses, potential facility consolidation costs, and historical margin pressure in periods of volume decline all present ongoing threats to both free cash flow generation and sustainable improvement in net profit margins over the long run.

Valuation

• The assumed bearish price target for Mayville Engineering Company is $18.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Mayville Engineering Company's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $27.0, and the most bearish reporting a price target of just $18.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $669.6 million, earnings will come to $19.2 million, and it would be trading on a PE ratio of 22.9x, assuming you use a discount rate of 8.8%.
• Given the current share price of $14.1, the bearish analyst price target of $18.0 is 21.7% higher.
• 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.