Tactical Growth Through Market Expansion And Lean Initiatives Bolsters Future Earnings

Key Takeaways

• New initiatives and acquisitions are poised to drive significant organic sales growth and above-market revenue growth.
  
• Implementation of lean initiatives and strategic pricing expected to notably improve net margins and adjusted EBITDA.
  
• Reliance on volatile markets and operational strategies facing diminishing returns could challenge revenue, margins, and growth amidst increasing competition and economic uncertainties.

Catalysts

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

• New project start-ups in the commercial vehicle and powersports markets are expected to drive nearly 7% year-over-year organic sales growth, positively impacting future revenue growth.
  
• Implementation of MBX lean initiatives resulting in approximately $2.5 million of sustainable year-over-year margin improvement, which is likely to improve net margins.
  
• Increased full-year 2024 total free cash flow guidance to between $45 million and $55 million, indicating a strong performance in cash flow conversion that could enhance earnings.
  
• Market share gains in key sectors, including incremental net sales expected from the Mid-States Aluminum acquisition, suggest potential for above-market revenue growth in 2025.
  
• Strategic pricing initiatives driving incremental adjusted EBITDA improvement; targeting between $1 million and $2 million of adjusted EBITDA growth from pricing initiatives by the end of the year, positively affecting earnings.

Assumptions

• Analysts are assuming Mayville Engineering Company's revenue will grow by 2.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.7% today to 4.0% in 3 years time.
• Analysts expect earnings to reach $27.0 million (and earnings per share of $1.26) by about September 2027, up from $10.7 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 26.0x on those 2027 earnings, down from 38.1x 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 grow by 1.11% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.39%, as per the Simply Wall St company report.

Risks

• The reliance on specific end markets like commercial vehicles and powersports for growth, amidst volatile demand and potential economic downturns, could negatively impact revenue and margins.
  
• Operational excellence and lean manufacturing initiatives (MBX) driving current margin improvements might face diminishing returns as easy gains are exhausted, potentially affecting net margins.
  
• Softening demand in key end markets, especially agriculture and commercial vehicles, due to macroeconomic factors such as interest rates or supply chain disruptions, could lead to reduced net sales growth.
  
• Increasing competition and price sensitivity in core markets may pressure the company to maintain or reduce pricing, adversely affecting revenue growth and earnings.
  
• Strategic M&A as a growth strategy introduces risks related to integration and achieving expected synergies, which could impact net margins and earnings if not executed flawlessly.

Valuation

• The analysts have a consensus price target of $27.0 for Mayville Engineering Company based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $30.0, and the most bearish reporting a price target of just $24.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $678.3 million, earnings will come to $27.0 million, and it would be trading on a PE ratio of 26.0x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of $19.76, the analyst's price target of $27.0 is 26.8% 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.