Miller Industries Stock: Remains Underfollowed And Undervalued (NYSE:MLR)

Miller Industries, Inc. (NYSE:MLR) has continued to post strong financial results over the past few quarters after coming off of a capex cycle which increased the company’s capacity to fulfill its backlog. The company has posted 30%+ revenue growth over the past 3 quarters, and in Q3, its operating margin was 8.6% compared to 4.1% in Q3 2022. Despite these improved results, Miller’s stock has not moved much since I first wrote about it in July 2022. I expect this gap between business results and the stock to close over time as business results continue to improve and the deleveraging process plays out. I am maintaining a buy rating and I believe there is a credible path for MLR to hit $60 within the next 12 months based on my estimate of 2024 earnings and based on my longer term earnings estimates.

Business Overview

At its core, demand for Miller’s products is determined by miles driven on the road, age of the global vehicle fleet, general construction, infrastructure construction, and to a lesser extent, natural disasters and global conflict. At this point in time, most of these are creating tailwinds for the company. Miles driven have been rising every year since the pandemic, light vehicle fleet age has recently hit record highs, and fiscal policy is driving demand for infrastructure construction.

General construction has a mixed outlook for 2024 as private office and retail construction will likely decline greatly due to high borrowing costs and WFH headwinds, but this will be offset by growth in manufacturing, warehouse and data center construction demand.

Miller doesn’t disclose its backlog in dollar amounts but in the most recent quarterly press release the company indicated that it remains well above historical levels despite not being at record highs. Along with its increased ability to fulfill its backlog due to its recent investments in manufacturing, these tailwinds should allow Miller to maintain solid revenue growth and higher margins going forward.

Some specific demand accelerators that are increasing demand more recently include pent up demand due to supply chain issues that are now improving, new truck demand pull forward due to EPA emission regulations that would affect all truck models beginning in 2027, and military recovery vehicle upgrades.

Company Culture

I touched on this in my previous article, but I think Miller has the right strategy and company culture to drive long term growth. This strategy entails focusing on company employees, distribution and product innovation. Some of these initiatives and investments may not be the best for the company’s bottom line today but these investments pay off over time. For example, the company has a training program for recent trade school grads that leads to full time opportunities at the company. Additionally, the C-suite makes donations which the company matches to an employee college scholarship fund.

These types of investments have helped Miller to grow its topline through business cycles and has led to margin expansion over time.

Valuation

Miller has no analyst coverage, thus it is not able to surpass earnings expectations. This may explain the lack of a reaction from the market to its fantastic earnings results over the past few quarters. In my last update on the company I valued the business at about $55 per share, and in that model I conservatively estimated that the business would earn a bit over $3 per share in 2023. Through the first 9 months in 2023, Miller’s EPS was $3.64, already greatly surpassing my expectations. I have updated my model to account for this business performance.

Despite the much higher price target, I still think this model uses conservative assumptions. I assume 5% revenue growth through 2028 and 2% revenue growth from 2029 to 2033, and that Miller’s operating margin declines to 6% and remains at that level through 2033. I also assume a 25% tax rate through 2033, that capex consistently outpaces D&A, that the terminal growth rate is 2% and the company’s cost of capital is 10%. This all leads to an $85 per share intrinsic value for the stock.

If my assumptions are correct, I understand that this value will only be realized if the market understands the bullish narrative for the stock. More realistically, I estimate that the stock can hit $60 per share within the next 12 months.

The stock has historically traded at around 15x earnings so I don’t see why it can’t trade at around 15x FCF once the market notices.

This is not a special situation or a catalyst bet, it is simply a value investment. Despite this, I think a potential dividend increase could act as a bit of a catalyst. The company generally takes a conservative approach to its balance sheet and has mentioned that they plan to pay down its debt from its current levels. Management didn’t indicate how much debt they plan to pay down, but the company has historically operated with a net cash position.

If Miller pays out 20% of its earnings as a dividend, which it has done in the past, the company could easily raise its dividend by close to 40%. The increase may not be this big, but I do expect a dividend increase in the future. This may function as a catalyst at some point but I would not expect it anytime soon.

Illiquidity

Miller is a relatively illiquid stock which only trades about $1.5mm in daily volume. If an investor has to exit the position quickly, they may not be able to do so easily and without forcing the stock price lower. If an investor interested in purchasing shares of MLR may need to exit their position quickly, it would be best to not invest at all.

Final Thoughts

An investment in Miller Industries is a value investment. It’s not a special situation or catalyst type investment, and the stock attracts little attention given the lack of sell-side coverage. As Miller continues to grow earnings, the market will take notice and the stock should trade closer to its intrinsic value, which I estimate is around $85. Within the next 12 months I think the market will take notice of the company’s improved financials results and the stock will trade closer to 15x 2024 free cash flow. This would put the stock at $60 and from there, over a longer-term period, I see a credible path for the stock to reach $85.