Mayville Engineering Navigates Cyclical Headwinds with Strategic Resilience

Mayville Engineering Company, Inc. (MEC) delivered a mixed but cautiously optimistic Q1 2025 earnings report, showcasing both the challenges of a slowing economy and the company’s ability to pivot toward less cyclical markets. While top-line sales fell 15.9% year-over-year (YoY) to $135.6 million due to inventory destocking and soft demand in cyclical sectors, sequential sales growth of 12% and maintained full-year guidance underscored operational discipline and strategic progress.

Sales Performance: Cyclical Pressures vs. Strategic Gains

The construction and access market revenue dropped 31.4% YoY, while agricultural sales fell 26.9%, with recovery delayed until 2026 due to macroeconomic and trade policy uncertainties. Similarly, powersports revenue declined 26.5% as retailers reduced inventories. However, the commercial vehicle segment—representing 38% of trailing twelve-month (TTM) revenue—held up better, declining only 13.7% YoY despite industry-wide softness. Management attributed this resilience to strong relationships with key customers and a focus on upcoming regulatory shifts.

The military segment emerged as a bright spot, with revenue growing mid-teens YoY, driven by aftermarket demand and new project wins. This diversification into less cyclical markets aligns with MEC’s reshoring strategy, as 95-96% of its inputs are sourced domestically. Management emphasized ongoing discussions with customers about tariff-related opportunities, which could unlock new business by late 2025 or early 2026.

Margins and Operational Efficiency: A Mixed Picture

Margin pressures were evident, with manufacturing margin dropping to $15.3 million (from $20.9 million YoY) and adjusted EBITDA falling to $12.2 million (9% margin vs. 11.5% in Q1 2024). Free cash flow also declined to $5.4 million (44% of EBITDA) due to lower sales volumes. However, sequential EBITDA margins improved by 140 basis points through cost discipline under the MBX operational framework, signaling progress in stabilizing profitability.

Strategic Initiatives: New Business Pipeline and Capital Allocation

MEC secured $35-40 million of new business wins by April toward its $100 million annual target, including projects in commercial vehicles aligned with 2027 EPA emissions regulations, an extended aluminum extrusions contract, and expanded construction/powersports partnerships. Capital allocation remained prudent: net leverage fell to 1.4x, with plans to reduce it below 1x by year-end. The company also repurchased $1.7 million in shares in Q1, leaving $17 million remaining under its authorization.

Financial Outlook and Risks

Full-year guidance remains intact: sales of $560-590 million, adjusted EBITDA of $60-66 million, and free cash flow of $43-50 million. Management expects modest commercial vehicle demand improvement in H2 2025 due to pre-buy activity ahead of EPA regulations, though agriculture and power sports remain vulnerable to macroeconomic slowdowns. Key risks include potential recessionary pressures, regulatory delays, and inflation-driven cost increases.

Investment Thesis: Resilience Amid Uncertainty

MEC’s stock rose 3.08% post-earnings to $13.57, with analysts citing an undervaluation at current levels. A free cash flow yield of 29% and a strong liquidity position (current ratio of 1.75) provide a margin of safety. While cyclical headwinds persist, the company’s focus on military reshoring opportunities, disciplined cost management, and a robust new-business pipeline position it to capitalize on stabilization in 2026.

The $28.50 price target from analysts reflects optimism about MEC’s long-term strategy. However, investors must weigh near-term risks: a recession could prolong weakness in cyclical markets, while delays in EPA regulation compliance could impact commercial vehicle demand.

Conclusion: A Strategic Play for Patient Investors

Mayville Engineering’s Q1 results highlight a company navigating a challenging macro environment with a blend of resilience and proactive strategy. Its mid-teens growth in the military segment, disciplined cost controls, and $35-40 million of new business wins demonstrate execution capability. While cyclical markets remain a headwind, the full-year guidance reaffirmation and 140-basis-point sequential EBITDA margin improvement signal underlying strength.

With a free cash flow yield of 29%—among the highest in its sector—and a net leverage target below 1x, MEC offers value to investors willing to ride out short-term volatility. The stock’s post-earnings jump and analyst optimism suggest that the market is pricing in a recovery by 2026. For those focused on long-term structural trends like reshoring and regulatory-driven demand, MEC presents an intriguing opportunity—if investors can tolerate near-term uncertainty.

Data points to watch: H2 commercial vehicle demand trends, progress on $100 million new business target, and leverage ratio improvements. Stay tuned as MEC continues to pivot toward growth markets while weathering the storm in cyclical sectors.