Description
Miller Industries (NYSE:MLR) is trading well below its intrinsic value and offers a great opportunity for investors to take a position in a company poised to improve its earning power through the current macro mayhem. The stock trading at $5.50, could more than double in the next 12 to 18 months.
Over the past year, the stock has fallen out of favor as starting in Q3 2007 and continuing through Q3 2008, sales contracted sequentially and year over year on account of the significant drop off in US highway miles driven. I believe this consumer response to the asymptotic run up in fuel prices hit its nadir in September, and I expect a trend reversal is now underway as gasoline and diesel prices have since returned to earthly levels. Also, as the lending freeze continues to thaw and credit becomes more available to small businesses, Miller’s top line will benefit as pent up demand for tow trucks becomes more apparent over the coming quarters.
In the mean time, the company’s seasoned management team is aggressively controlling production and administrative costs to keep the business profitable. Through what conceivably may have been the toughest three quarters ever experienced, the Company remained profitable and YTD through Q3 2008, reported earnings of $0.25 per share.
The Company:
The roots of Miller Industries go back to the Ernest Holmes Company which, at the turn of the 20th century, manufactured the first American tow truck. Today, Miller Industries manufactures a broad line of steel and aluminum wrecker and car carrier bodies. These successors to the first generation tow truck are equipped with special components like hydraulics and winches that are installed on truck chassis manufactured by other suppliers. The Miller product line includes several industry leading brands such as Chevron, Vulcan and Century.
Over several decades, Miller has built an extensive distribution network consisting of approximately 120 independent distributors in North America, who serve all 50 states, Canada and Mexico, and approximately 50 overseas distributors that serve foreign markets.
Its end customers include 120,000 repair shops, re-possessors, salvage operators, and auto dealers. About 30,000 professional towers, however, form the core of the industry with about 70% of the business. About one-third of these professionals concentrate on offering light towing services to the consumer market, while the remaining two-thirds focus on the commercial market. The light duty wrecker market consists primarily of professional wrecker operators, repossession towing services, municipal and federal governmental agencies, repair shops, and salvage company owners. Professional wrecker operators dominate the heavy-duty market and serve the needs of commercial vehicle operators.
Competitive Position/Balance Sheet Strength:
In 2007, Miller industries had sales of $400 million, and greater than 50% market-share of its small niche market. Tow truck and recovery equipment manufacturing is a niche industry that can be categorized as an oligopoly with two dominant competitors – Miller Industries and Jerr-Dan (an Oshkosh subsidiary). These two companies together account for approximately 75% of all US sales. The remainder of the market is shared by much smaller, privately owned, regional companies.
Miller Industries has a good balance sheet and a net cash position of $1.51 per share which makes it a likely candidate to not only survive the downturn, but come out stronger as the parent (Oshkosh) of its closest competitor Jerr-Dan struggles to stay solvent. I expect Miller Industries will gain market share through the current down turn as it closest competitor Jerr-Dan remains distracted with its financial troubles and some of its smaller, regional competitors succumb to vagaries of a protracted recession.
Valuations very attractive:
The stock is trading at rock bottom multiples and, at the current price, the risk/reward proposition looks very attractive.
The Company’s debt gearing has changed considerably since 2003, when it divested its un-profitable national distribution business. Changing debt levels and a different business model render historical P/E and P/S comparisons inappropriate, and thus, to assess a fair value of this stock, I use the EV/EBITDA ratio. The historical multiples for this ratio are as follows:
Based on my sales and EBITDA estimates for 2010 and an assumption of reversion towards median multiples on the back of improving fundamentals, the stock could easily rise to $15 per share in the next six to eight months.
As a second alternative, I estimate the stock’s intrinsic value based on comparable past transactions. In 2003, Oshkosh acquired Jerr-Dan for $80 million or at 0.8 times sales of $100 million. Arguably, Oshkosh appears to have over-paid for the acquisition. Applying a more conservative 0.5 transaction multiple to my estimate of MLR’s 2009 sales, leads to a buy out value of $12 per share, or $13.50 including their cash.
As a third alternative, I estimate value through a DCF analysis, with a modest 4% growth assumption and operating margins at historical median levels, which leads to a conservative $10 per share fair value assessment. In late 2004, the Company secured a large order to manufacture heavy duty wreckers for the Australian Military which gave revenues a significant boost. In 2005, it secured a similar, although smaller, sub-contract order to manufacture trailers for the US Military. My future revenue growth assumption excludes the recurrence of such lumpy orders, although, during the most recent earnings call, management indicated it is aggressively pursuing similar opportunities with several US suppliers. If such an order materialized in 2009, the stock could rise to $15 - $20 per share.
Catalyst
- Revenue contraction and the steep drop in US highway miles driven both trough, and on the heels of the precipitous drop in energy prices in the later half of 2008, start to once again rise over the course of 2009.
- Increased market share and pricing power coming out of the economic down turn.