What a time it’s been for Mayville Engineering. In the past six months alone, the company’s stock price has increased by a massive 68%, reaching $30.40 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is there a buying opportunity in Mayville Engineering, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Is Mayville Engineering Not Exciting?

Despite the momentum, we’re cautious about Mayville Engineering. Here are three reasons why MEC doesn’t excite us, plus one stock we’d rather own.

1. Revenue Tumbling Downwards

We at StockStory place the most emphasis on long-term growth, but within industrials, a stretched historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Mayville Engineering’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 4.3% over the last two years.

2. EPS Took a Dip Over the Last Two Years

Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.

Sadly for Mayville Engineering, its EPS declined by more than its revenue over the last two years, dropping 42.7%. This tells us the company struggled to adjust to shrinking demand.

3. High Debt Levels Increase Risk

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Mayville Engineering’s $221.3 million of debt exceeds the $2.07 million of cash on its balance sheet. Furthermore, its 5× net-debt-to-EBITDA ratio (based on its EBITDA of $40.54 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Mayville Engineering could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Mayville Engineering can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

Final Judgment

Mayville Engineering isn’t a terrible business, but it doesn’t pass our quality test. After the recent surge, the stock trades at 55× forward P/E (or $30.40 per share). This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere. We’d recommend looking at one of our all-time favorite software stocks.

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