Over the past six months, Mayville Engineering’s stock price fell to $19.25. Shareholders have lost 8.8% of their capital, which is disappointing considering the S&P 500 has climbed by 12%. This may have investors wondering how to approach the situation.
Is now the time to buy Mayville Engineering, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Mayville Engineering Will Underperform?
Even though the stock has become cheaper, we don’t have much confidence in Mayville Engineering. Here are three reasons why MEC doesn’t excite us, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Regrettably, Mayville Engineering’s sales grew at a mediocre 6.9% compounded annual growth rate over the last five years. This fell short of our benchmark for the industrials sector.
2. Low Gross Margin Reveals Weak Structural Profitability
For industrial businesses, cost of sales is usually comprised of the direct labor, raw materials, and supplies needed to offer a product or service. These costs can be impacted by inflation and supply chain dynamics in the short term and a company’s purchasing power and scale over the long term.
Mayville Engineering has bad unit economics for an industrials business, signaling it operates in a competitive market. As you can see below, it averaged a 12.2% gross margin over the last five years. Said differently, Mayville Engineering had to pay a chunky $87.81 to its suppliers for every $100 in revenue.
3. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Mayville Engineering, its EPS declined by 17% annually over the last five years while its revenue grew by 6.9%. This tells us the company became less profitable on a per-share basis as it expanded.
Final Judgment
We cheer for all companies making their customers lives easier, but in the case of Mayville Engineering, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 29× forward P/E (or $19.25 per share). This valuation tells us a lot of optimism is priced in - you can find more timely opportunities elsewhere. We’d suggest looking at the most entrenched endpoint security platform on the market.
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