Description

For the micro-cap investor and those looking for a current payout on their investment I'm calling attention to a simple business that has fabulous economic characteristics. I'm just outside the 6 month window on this one as Mile Marker was previously written up by Tim321 in March at $4.00. He made a great short term call as the idea generated a 30% return over a 3 month time period. Since then the stock has more than round-tripped (Tim321 disclosed his exit in the thread of his post) and now sits at $3.40.

Please refer to the previous write-up for an excellent description of the business and its unique features. In brief here’s the prior description – “Mile Marker International (“MMRK”) is a distributor of specialized vehicle parts primarily for the 4-wheel drive recreational / utility / military vehicle markets. The companies claim to fame is a patented hydraulic winch that utilizes a vehicle’s power steering pump as its energy source.”

Why the second write-up? This looked cheap to me at $4.00 and at $3.40 is even more compelling given what has transpired since March. The question is - is it perma-cheap? I don’t think so.

Not much has changed regarding financial metrics since March.

Mile Marker is still:
1) extremely profitable (40%+ ROIC & 50%+ ROE
2) cheap (7.6x EBIT/EV),
3) growing (34% revenue growth the past 4 years – temporary slow down this year),
4) understandable (they make winches),
5) excellent revenue visibility ($50mm+ backlog or 2 times 2005 revenue on just a portion of their revenue stream),
6) a demonstrated edge (patented hydraulic winch and reasons why they are the low cost producer),
7) management that buys back stock and pays out a healthy and growing 7.3% dividend yield.


Capitalization:

Stock Price: 3.4
Shares Outstanding: 10mm
Total Debt: 5.4mm
Cash: .15mm
Market Cap: 34mm
EV: 39mm
Dividend Per Share: .25
Div Yield: 7.65%
ROIC: >40%
ROE: >50%

Multiples:

EBIT: 7.6x
EBITDA: 7.3x
P/E: 11x
Sales: 1.6x


My investment thesis is fairly simple. It is based on the following assumptions:

Revenue from existing military contract comes in over the next four years – then ends (although logic would state that they may obtain future military contracts at some point, but that isn’t part of this thesis). Revenue from the commercial side grows (in a lumpy fashion) at a 20% rate and revenue from military relationship leads to nominal follow on business (spare parts, replacements, etc.) at 10% of current rate (educated guess).

What are the risks? Military contract is solid as is evidenced by the history of the company and previous military contracts. Commercial side has a large to “vast” market. Executives at the Company believe MMRK has a product that fits into a $500 million market (up to $2B) leaving large upside – 20% may be conservative. 20% growth on the commercial side results in total commercial sales five years from now at approx $40 million (still a very, very small company). In four years MMRK will have installed 40,000 to 50,000 winches on military vehicles (retro-fit and new). Just have to believe that after 5-6 years of good performance that other opportunities will present themselves.

The result is total revenue five years from now in the $45 million area. Bear in mind that any one order could just blow this number away (such as a significant ATV order or other similar application – troop transport trucks for example).

At $45 million and historical operating margins of 20% you get $9 million in ebit. Applying an 8 multiple gets you $72 million or an approximate share price of $7. That is more than a double from here plus you get the 7% dividend along the way.

My entry point to earn my 20% hurdle rate is $4.20. Thus I think MMRK offers 25% upside to fair value and then is a potential 20% per year performer (including dividends).

Margin of safety?
Management. These guys are on the ball. I’ve had a number of conversations with them over the past 6 months and walk away feeling confident about them – very straight shooters. They keep a very tight eye on expenses (key executives took a temporary pay cut of 20% this summer to save money to help build inventory). They have stated they have no intention of cutting the dividend as it provides significant cash flow to current founders/owners who own far in excess of 50% of the stock.

Risks.
Military order becomes a fiction or significantly delayed.
Main competitor engages in self destructive price war (they can’t match MMRK’s cost structure).
Because it is so small, there is always a risk of a takeunder, but that would surprise me from this management.
There is a small float on this company, so it is obvious it won’t appeal to all.


Catalyst:
Return of normalized military releases / P.O’s on the contract.
Value wills out.

Catalyst

Return of normalized military releases / P.O’s on the contract highlights continued progress on growing revenue and the significant operating leverage and profitability.
Value wills out.