|Shares Out. (in M):||11||P/E||13.6||9.0|
|Market Cap (in $M):||309||P/FCF||12||8.3|
|Net Debt (in $M):||0||EBIT||34||51|
|TEV (in $M):||255||TEV/EBIT||7.5||5.0|
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How often can you purchase the clear industry leader in a market at a bargain basement price because of short term issues? This is what we value investors live and die for! This is what has made classic value investors, like Warren Buffett, billionaires over the decades. Whether its American Express or Johnson and Johnson, its when some short term issue drives the price to bargain levels but long term value is unaffected that opportunity knocks!
Miller Industries (MLR) fits the classic profile perfectly and presents an excellent investment opportunity at its current price. Believe it or not, it was written up in VIC over 13 years ago and it turned out to be an extremely timely recommendation at the time. MLR is the world's largest manufacturer of towing and vehicle recovery equipment and by far the dominant player in this market.
MLR manufactures a wide range of wrecker, towing and recovery equipment. It sells its products through independent distributors operating in all 50 states, Canada and Mexico. There are some international sales, but 88% of 2021 sales were in the US. Incredibly, 85% of its distributors sell Miller brands exclusively, showing how dominant they are in the industry. It's only major competitor in the US is Jerr-Dan, a division of Oshkosh Corp.
Wreckers are used to recover and tow disabled vehicles and other equipment and range in size from the conventional tow truck to large recovery vehicles with up to 100 ton lifting capacity! Light-duty wreckers (less than 16 tons) are used to remove vehicles in an accident, illegally parked, abandoned or disabled. Heavy-duty wreckers (greater than 16 tons) are used for towing and recovery of over-turned tractor trailers, buses, motor homes and other large vehicles.
The Company also manufactures car carriers which are specialized flat-bed vehicles with a hydraulic lift mechanism. They are used to transport new vehicles, used vehicles and other equipment. Finally, the Company manufactures transport trailers, which are multi-vehicle transport trailers with two levels and hydraulic ramps for loading vehicles. They are easy to load and transport 6 to 7 vehicles.
The Company has a long history of innovation. Their brands are associated with four of the five major innovations in the industry: the rapid reverse winch; the low sling; the hydraulic lifting mechanism; and the under-lift with parallel linkage and L-Arms. The Company has an engineering department of 50 engineers constantly working to improve their products and innovate. Recently, the Company developed the M100, which the Company believes will be the world's largest tow truck.
The Company has six manufacturing facilities located in the US, France and UK. The manufacturing process consists primarily of cutting and bending sheet steel or aluminum into parts that are welded together to form the wrecker, car carrier body of the trailer. Recently, to reduce vehicle weight, the Company has begun to produce non-metallic wrecker bodies. After the frame is formed, hydraulic cylinders, valves and pumps, purchased from third-party suppliers, are attached to the frame to form the completed wrecker or car carrier body. The completed body is then installed onto a truck chassis either by the Company or shipped to a distributor. The Company has spent over $82 million from 2017 to 2021 on property, plant and equipment to ensure that the Company utilizes the most efficient and latest technologies in its manufacturing process.
Here is the Company's recent performance (Source: Value Line, 2022 estimates are mine):
2017 2018 2019 2020 2021 2022(E)
Sales Per Share 54.06 62.46 71.77 57.11 62.88 88.60
Earnings Per Share 2.02 2.96 3.43 2.62 1.42 2.00
Dividend Per Share 0.72 0.72 0.72 0.72 0.72 0.72
Cash Flow Per Share 2.56 3.64 4.23 3.46 2.48 3.00
Operating Margin 6.1% 7.2% 7.6% 7.4% 9.7% 7.0%
Book Value 17.85 19.97 22.63 24.77 25.29 26.60
As you can see, in the years leading to the pandemic, management had performed well to consistently grow the enterprise. Between 2017 and 2019 revenue grew from $615 million to over $818 million. Then in 2020 the pandemic hit and revenue plunged over 20% to $651 million. In 2021 revenue made a partial recovery to $717 million, rising over 10%. During 2020 the Company was temporarily shut down but what really hurt were the disruptions in the supply chain that caused delivery delays in both production and delivery of its products. Lack of important components made completion of orders very difficult.
Although sales made a nice recovery in 2021 profitability has not. Rising inflation and supply chain disruptions and constraints have hurt gross margins. But, what's extremely encouraging is that demand is at an all time high! Recent fourth quarter sales recovered nicely from last year growing over 13%, but net income was squeezed by inflation and supply chain challenges. CEO, Bill Miller, commented in the most recent press release, " We continued to experience supply chain challenges and inflation pressures in the fourth quarter. While it remains difficult to secure certain parts for our products..., we are pleased with the steps we have taken to improve the underlying business. We expect that our inventory build-up and strong back-log levels will allow us to capitalize on the demand in our end-markets as supply chain issues ease." The Company is unsure of the timing but is highly confident of returning to traditional levels of profitability. As the Company has moved into 2022 supply constraints and inflationary pressure have begun to ease. This looks like the classic situation of a great Company hit by short term challenges, which are being addressed and they clearly have the resources to handle.
The share price has collapsed from a high of over $46 to the most recent price of $27. Based on 2021, highly depressed earnings, the P/E looks like about 19, but wait. MLR has a pristine balance sheet which includes $54 million ($4.76/share) in cash and no long term debt. If we subtract the cash from the share price the P/E drops to a reasonable 15.7 times depressed earnings. There is no reason to expect that the supply and inflation issues will not be resolved over the coming few years, or perhaps sooner, and earnings will return to a more reasonable $3 per share, making some conservative assumptions about growth. This would make the current, cash adjusted P/E 7.4!
The current share price assumes that there will be no recovery in Miller's earnings despite a record backlog and an industry dominant position. Their equipment is critical. Existing equipment is old and needs replacement. Customers are lining up to purchase their equipment. What's a reasonable multiple on $3 of earnings? How about a very conservative 12? So, 12 X $3 + $4.50 in cash yields a price of $40.50 or 50% above the current share price! And $3 is by no means peak earnings. The Company earned $3.43 per share in 2019. And as we wait for the share price to adjust we continue to earn a reasonable 2.7% dividend yield for our troubles.
Management owns only 3% of the Company, but the highly reputable small cap investment firm, Royce & Associates, holds a 14% position. We would prefer a higher management stake, but the positive is that the firm is vulnerable to a nice tuck-in acquisition by one of the large auto manufacturers, who could improve the efficiency of the operation.
So what, in summary, is the investment case?:
1) Miller is the undisputed leader in manufacturing towing and wrecking equipment and has a long history of superior technology and innovation.
2) Management believes that customer demand is at an all time high.
3) On the recent earnings call, management noted that $14 million of billable product was being held up by $20k in parts!
4) All indications are that recovery of the business should occur during 2022.
5) The Company has a lucrative moat built over 3 decades of 85% of dealers only offering their product.
6) Management is extremely experienced in handling the cyclicality of the business.
7) Most importantly however we are looking at a stock that is extremely cheap at 7 times reasonably expected conservative earnings. It has almost $5 in cash per share. It sells for about 1.11 times tangible book value, which includes over $82 million in recent spending to upgrade its equipment.
What can go wrong? Inflation continues to spiral out of control. The Fed raises rates too rapidly or too high leading to a recession. The hostilities in the Ukraine escalate to more serious levels. These are all macro concerns that will impact all businesses and would only delay Miller's ultimate recovery.
What we see here is an outstanding, industry-dominant Company, selling at a depressed price because of short term issues. There is no issue here that fundamentally effects the long term viability or demand for the Company's products. Patience will be rewarded.
1) Recovery of earnings in 2022
2) Resolution of supply chain issues
3) The firm is taken private
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