Founded in 1990 by William Miller by merging three underperforming manufacturers, Miller Industries is the world’s largest manufacturer of specialty towing and vehicle recovery equipment. The company is headquartered in Ooltewah, TN, and employs ~1,300 workers across four manufacturing facilities in the US, two in France, and one in Britain.

MLR sells through a network of 78 distributors in USMCA and one each in 17 other countries, covering all continents. The management team is divided accordingly – Jeff Badgley and William Miller II cover International and Domestic, respectively, and have since 2013. The company has a long history, with its Holmes brand predecessor dating back to 1916 and the invention of the first tow truck, and Century developing the first hydraulic towing equipment in 1974. Its merged entities IPO’d in 1994, and expanded to Europe in 1996 through acquisition. From the late ‘90s through 2014, the company was the official provider of wreckers and towing equipment for NASCAR events. Its customer base is mostly professional commercial operators contracting with governments, car dealerships, salvage/repo, or other towing services.

The company has no long-term supply contracts. The company purchases chassis from Ford, Dodge, and Paccar (Kenworth), among others, and retrofits them into light- and heavy-duty wreckers and car carriers able to tow up to 100 tons. Steel and aluminum prices in its supply chain (including those of the underlying chassis) might be impacted by the ongoing tariff negotiations (see: “Trade War”) between the US and China. MLR laser cuts, welds, and retrofits the chassis to make car carrier flatbeds and specialized trucks with scoops, cranes, and winches used to recover disabled vehicles up to 100 tons. The manufacturing process can be seen here[1]:

One of MLR’s more attractive attributes is its significant moat in the form of its distribution network, or lack of competition therein. Not only are its vehicles and their services specialized, but MLR’s management team estimates 85% of its distributors have no alternative provider for towing equipment. As a result, the company will continue to maintain its strong niche unless an upstart or foreign brand comes in to disrupt. Miller is working to get well ahead of this threat in any case, opening a new 50-engineer research and development facility in Chattanooga, TN, in 2019 and spending $92mm between 2015-19 to upgrade its existing US manufacturing facilities. It is also well-positioned in the EU to take advantage of Brexit, with its global sales network and sites in France and Britain since the ‘90s.

For the coronavirus period YTD 2Q 6/30/2020, the company temporarily shut down production, leading to delayed deliveries at the end of March and a steep dropoff in sales (down 27% from prior period 2019 to $304mm, on pace for $600mm in 2020 sales). EBITDA margins contracted from 7.4% to 6.5%, while YTD EBITDA dropped from $31mm to $20mm for the same January – June period. The Company has played the crisis according to a conservative playbook, collecting on accounts receivable to grow its cash balance to $37mm while decreasing liabilities from $134mm to $99mm (debt of $5mm).

MLR’s basic annual financials are below:

For the prospective equityholder, MLR pays a $0.72 dividend (2.3% at the current trading price of $30.75), paid consecutively since May 2011. The current management team has worked together in some form or fashion since the 2000s. Since taking over in 2013 until September 2020, management has knocked the cover off the ball:

• Price has grown at a 7.4% CAGR to its current $350mm market cap
• Revenue CAGR 11% annually
• EBITDA growth from $29mm to $62mm and margins from 5.8% to 7.6%
• Annual dividend grew 21%, currently 2.3% yield, while reducing payout ratio from 46% to 21%
• Capital expenditures of $97 million to renovate US facilities
• Limited debt: maximum $16mm in 2018, compared to lowest cash balance of $22mm in 2017. Lowest cash to debt ratio since 2014 was 1.72x (2018).

This management team is quality. Unfortunately for Inverness’s endeavors, very limited utilization or volume data comes out on MLR. The company had an estimated 435 shareholders as of 2/28/2020, so discoverability is high for a niche company trading at EV/EBITDA of 9.2x (but which pre-covid had been trading between 5x-7x for the past five years). The wide moat with limited competition points to pricing power as well, and in my opinion the management team operated well during COVID.

The company’s bylaws have strong antitakeover provisions including a minimum 5-year equity ownership period for prospective buyers, so management can see purchase attempts coming a long way off. A liquidation value analysis[2] reflects net discounted assets of $99mm, which with market capitalization trading 3.5x does not present the best margin of safety, but with dividend compensation, no debt, large market share, cash on the balance sheet, and a slight COVID-induced decline in share price to create buying opportunity, who could hate this company?

Inverness estimates DCF value at $200-250mm on $50mm of EBITDA due to COVID. Given the pandemic contraction was a major event, Inverness is comfortable using a run-rate EBITDA number of $40mm, but we do not believe the pandemic will last as long as broadly feared, so are comfortable using the healthier $50mm EBITDA metric. On an EV/EBITDA basis, the company exhibits a low valuation (under 6.0x), perhaps driven by EBITDA growth or the low level of awareness (major equity research analysts do not officially cover the name). If you want to add a company to your portfolio that trades at or below its intrinsic value, which is a producer of trucks to help you when your car is broken down or vehicles are otherwise disabled, this is the one.

Tl;dr: Long MLR: specialized towing equipment manufacturing industry leader, buy below intrinsic value estimated between $275-325mm in market cap ($30/share) 9/12/2020. 2.3% dividend, performing management team, strong market share, global presence, and growing.

Sources: 10-Ks and annual reports, Bloomberg.com, millerind.com, Wikipedia

Inverness Holdings has no ownership interest in any companies discussed herein.

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[1] Inverness Holdings receives no compensation for this video

[2] One of our favorites, inspired by Peter Cundill. At the end of the company’s life, one can assume all operations will cease and the company is to be dissolved. To find out how much in assets will be left for equityholders after liabilities are paid off, take customary bank advance rates against accounts receivable (75-85%), inventory (40-50%), and net PPE (40%), reflective of asset value at time of a bankruptcy. Add them together, subtract liabilities, and you are left with a measure of the company’s tangible net worth. If you are fortunate enough to buy assets at a market cap below that level, you have succeeded at the Buffett and Graham task of “buying a dollar for fifty cents”.