Mayville Engineering: A Small-Cap Engine for Growth

In a market increasingly dominated by large-cap stalwarts, Mayville Engineering Company (MEC) stands out as a rare small-cap gem. Driven by strategic acquisitions, operational discipline, and a focus on high-margin markets, MEC has quietly built a compelling case for investors seeking growth at a discount. Let's dissect why this $327 million enterprise could be primed for outsized returns.

Acquisition-Driven Growth: Fueling the Engine

The crown jewel of MEC's strategy is its acquisition of Mid-States Aluminum (MSA) in late 2023. This bolt-on deal not only added $22.8 million in sales to its “Other” end market (up 126.8% year-over-year) but also bolstered its position in lightweight aluminum products—a critical component for industries transitioning to electric and sustainable technologies.

The MSA acquisition's financial impact is undeniable: it contributed $4–6 million to annual EBITDA and helped MEC achieve a 28.4% YoY rise in adjusted EBITDA to $19.6 million in Q2 2024. Crucially, MEC has already reduced its net debt to $125.1 million, lowering its leverage ratio to 1.7x, well within its 1.5x–2.0x target. This disciplined capital allocation leaves room for further bolt-on deals, particularly in high-growth sectors like energy transition and fleet electrification.

Margin Expansion: The Flywheel Effect

While acquisitions provide top-line fuel, MEC's real magic lies in its bottom-line discipline. The company's MEC Business Excellence (MBX) initiative has been a margin juggernaut. In Q2 2024 alone, MBX delivered $900,000 in cost savings through sourcing and labor optimizations, plus $600,000 in pricing improvements via value-based negotiations. These efforts pushed the adjusted EBITDA margin to 12.0%, up 100 basis points YoY, with management targeting 14–16% by year-end 2026.

Even in challenging end markets—like the 26.2% drop in military sales—MEC's operational focus shone. Improved utilization at its Hazel Park facility and fixed-cost absorption allowed margins to grow despite uneven demand. Meanwhile, its free cash flow (FCF) surged to $19.2 million in Q2 2024, a staggering 229% YoY increase, as working capital management and cost discipline kicked in.

Undervalued: A Contrarian Play

Despite its progress, MEC trades at a 5.24x EV/EBITDA multiple, far below the industrial sector's 14.72 median. With a trailing P/E of 14.8x and a forward P/E of 21.3x, the stock looks cheap relative to its growth trajectory. Analysts' average price target of $19.67 (23% upside from current levels) suggests the market hasn't yet fully priced in MEC's margin expansion and FCF growth.

The company's $45–55 million FCF guidance for 2024—up from $23.8 million in 2023—backs this optimism. With $314 million in liquidity (cash plus revolver availability), MEC has the flexibility to repurchase shares ($24 million remaining under its authorization) or pursue additional acquisitions without over-leveraging.

Catalysts and Risks

Catalysts:
- Margin expansion to 14–16% by 2026.
- FCF growth to $65–75 million by 2026.
- Potential bolt-on deals in aluminum and energy transition segments.

Risks:
- Softness in commercial vehicle and agricultural markets could pressure sales.
- Inflation and supply chain disruptions could erode margins.
- Execution risk if MBX initiatives lose momentum.

Investment Thesis

MEC checks all the boxes for a contrarian small-cap play: it's undervalued, has a clear path to margin expansion, and is capitalizing on secular trends in lightweighting and electrification. With an Altman Z-Score of 2.72 indicating low bankruptcy risk and a strong liquidity position, MEC is positioned to outperform peers as it scales.

For investors, the setup is compelling: buy now for a 23% upside to analyst targets, with catalysts like margin milestones and FCF growth to drive near-term momentum. The risks are manageable given its diversified end markets and disciplined capital allocation.

In a crowded market, MEC isn't just a small-cap story—it's a big idea in a small package.

Disclosure: This analysis is based on publicly available data as of June 2025. Always conduct your own research or consult a financial advisor before making investment decisions.