Miller Continues To Fire On All Cylinders, But Military Projects Present Concerns – Miller Industries, Inc. (NYSE:MLR)


Miller Industries (MLR) reported a year-over-year revenue growth of 23.9% for the first quarter. Although the company did not tout it, income per share increased 28.8% year over year. However, the market apparently focused more on a pair of tweets from President Trump three days before the announcement, and the stock price dropped from $34 to $26 by the end of May.

ChartData by YCharts

Ordinarily, such a drop in Miller stock presents a nice entry point for investors interested in buying, but its military projects present concerns.

Business

Miller’s business is simple. It manufactures the bodies of wreckers and installs them on chassis from third-party manufacturers.

Source: Miller Industries

The company also manufacturer bodies for car carriers.

Source: Miller Industries

It further manufactures transport trailers.

Source: Miller Industries

In addition to four plants in the United States, the company has manufacturing facilities in France and England. Independent distributors sell the company’s products in 50 states, Canada Mexico, Europe, the Pacific, the Middle East, South America, and Africa.

In its reports, Miller claims to be “The World’s Largest Manufacturer of Towing and Recovery Equipment”. Competitors include companies such as Powerbilt, Weldbuilt, Danco, and AATAC, but these are all private companies and numbers are not available for them. Another competitor, Jerr-Dan, was acquired by Oshkosh (OSK) in 2004, but Oshkosh does not break out numbers for wrecking and towing equipment.

Miller Industries’ chairman, William “Bill” Miller, created the company in 1990 by consolidating three big wrecker manufacturer names struggling with debt incurred from leveraged buyouts: Century, Challenger, and Holmes. By 1994, Miller showed a profit and took the company public. The IPO paid off the debt, and the remainder went back into the company. The company then acquired both Jige in France and Boniface Engineering in the United Kingdom in 1996. Jige claims to be the leader of the European market. By 1997, Miller was reportedly so successful that the Justice Department claimed he was in danger of creating a monopoly. The claim was later dismissed.

Valuation

The stock price may have dropped in the past month, but it has been climbing for the past decade, increasing from $11.21 at the end of 2009 to $30.05 at the end of 2018. Earnings per share has more than paced the stock price, tripling from $0.98 in 2009 to $3.04 at the end of 2018. As a result, its P/E has been dropping since 2012, and it is currently in single digits.

Source: Author chart derived from company filings with the SEC

Dividends and Total Return

The company initiated dividend payments in 2010 and raised them every year through 2017. However, in 2018, it stopped raising the dividend. No reason has been given, nor has the analyst who occasionally attends calls asked for a reason. Miller Industries Investor Relations has not responded to my calls.

The lack of dividend growth may have taken the stock off the radar for dividend growth investors. The dividend yield is nevertheless at 2.62% as of this writing, and the dividend payout ratio has dropped substantially.

Source: Author chart derived from company filings with the SEC

Given a healthy dividend and a growing stock price, investors have been rewarded with significant total returns. The total return percent dropped below 15% only in 2017, and it is typically above 20%.

Source: Author chart derived from company filings with the SEC

The dividend remains secure. While the company has a long history of paying off debt, and it has shown an increasing willingness to take on more debt, the balance sheet nevertheless remains solid. The Quick Ratio, Current Ratio, and Net Current Asset Value all have remain at 1.5 or higher, as they have since 2013.

Source: Author chart derived from company filings with the SEC

Risks and Growth Prospects

The company has noted a risk in its most recent 10-Q and 10-K:

We are also very focused on efforts to secure new orders that would replace several of our substantial military projects that are scheduled to be completed over the course of this year.

As can happen with military projects, no further mention is made about them. The numbers for them are not broken out, and it is not possible to know how “substantial” these projects really are.

In addition to these risks, Miller Industries regularly reports concerns with consumer confidence, credit markets, and increases in fuel and insurance costs for customers.

Another note says that the company’s French subsidiary, Jige International S.A., took an unsecured loan for “the purchase of land and routine repairs”. Why would it purchase land? No further mention is made, but it is possible that the company intends to expand in France.

Takeaway

Miller’s total return remains strong, even if the dividend has not been raised in more than a year. Its balance sheet remains strong as well. The stock price can make for a bumpy ride, but overall it has gone up significantly, while the P/E ratio continues to drop.

Investors have a tendency to sell off the stock in the face of macro worries rather than the strength of the underlying company, and this creates frequent opportunities to buy. The stock has recently dropped more than 20%, which makes the current price an attractive level at which to buy. Typically, I would add without hesitation at the bottom of such a drop. If the price drops below $26, it will be exceptionally tempting for me to add.

However, I hesitate to add shares at this time, for the simple reason that I do not know how successful the company will be in securing new military projects to replace the ones that will be completed this year. Therefore, I believe Miller is a Hold at this time. However, if an announcement is made that the military projects are replaced, I expect the stock will become a Buy rather quickly. If the military projects are not replaced, I will reevaluate as the new numbers become better known.

Disclosure: I am/we are long MLR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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