Mayville Engineering (MEC)

The global supply chain crisis, that has been occurring since the coronavirus pandemic first began, has tipped the manufacturing sector on its head in the last year and a half. The old way of doing things is being seriously reconsidered as companies struggle to find parts and supplies to make their goods. Logjams and structural issues with logistics are causing holdups with deliveries and causing prices to skyrocket. In an instant, the days of sourcing the cheapest labour from the furthest away nations doesn’t seem like such a great idea. Could US manufacturing be therefore making a comeback?

Moving freight via the ocean has become a massive liability for companies. With the general public now relying on online shopping, rather than heading to the shops themselves, ports are backed up, unable to cope with the excess demand. There aren’t enough ships, dockworkers, or space to accommodate it all. Rates for transporting goods are up 460% over the last year. Goods can sit in a port for weeks on end without moving.

Problems then pop up in the weirdest places. Did you know for instance that approximately 2 billion pallets cross the US at any one time carrying pretty much anything that can fit on them? Anything that is shipped anywhere is done so on a wooden pallet. With increased transportation needs the demand for pallets has outstripped supply. Pallet costs themselves are up 400%, and lumbar prices hit all-time highs in May and despite a recent pullback are still 25% higher than they were before the pandemic began. All this heaps cost onto products needed by manufacturers.

Economists say the proliferation of the Just-In-Time supply system is to blame. JIT was introduced by Japanese car manufacturers in the 1960s to cut overheads by simplifying their supply chains. Instead of storing products that had been manufactured in house, they were sourced on an “as needed” basis. It requires a highly organised and predictable supply chain to work effectively. When done correctly there are no inefficiencies thereby keeping costs as tight as possible. In the 1970s, and because of its success, American companies copied the Japanese approach to the point that JIT is how supply chains have run globally for the past few decades.

However, with the JIT system of supply, and the globalisation of manufacturing, there are chinks in the supply armour. As we have recently found out thanks to a global pandemic. When you’re manufacturing a washing machine, for instance, and relying on parts coming from all over the world, it only takes one small part to be delayed and the whole production process is brought to its knees. It has caused many US companies to reflect hard on where they manufacture and source the products needed to make their goods.

“Reshoring” has become the new trend. This is the process of returning the production and manufacturing of goods back to the company’s original country. American companies are finding that the costs to bring back manufacturing onshore are so close to the costs overseas the benefits far outweigh the small amount of extra expenditure. It’s been a priority for US governments since the Obama administration as it’s great for jobs, the economy, and the trade deficit. But things have really started to pick up with the onset of global lockdowns.

This move has been great for US manufacturer Mayville Engineering Company -aka MEC. They’ve been based in Wisconsin since 1945 specialising in metal fabrication and supplying products to Deere (DE), Paccar (PCAR), Honda Motor (HMC), and Caterpillar (CAT). They can weld, press, coat, laser-cut, bend, turn, stamp, roll, and assemble to a client’s specifications.

According to their website, MEC is a leading U.S.-based contract manufacturer that provides a broad range of prototyping and tooling, production fabrication, coating, assembly and aftermarket services. “Our customers operate in diverse end markets, including heavy- and medium-duty commercial vehicles, construction, powersports, agriculture, military and other end markets. We have developed long-standing relationships with our blue-chip customers based upon a high level of experience, trust and confidence. “We Make Things Simple” by providing a diverse set of process offerings and a “one-stop shop” for end-to-end services with benefits throughout the entire product lifecycle, including front-end collaboration in design and prototyping, product manufacturing, aftermarket products and ancillary supply chain benefits”.

They specialise in the mid-level volume stuff. Things that their clients don’t use enough to warrant manufacturing themselves. MEC can pool together a group of companies with the same needs and make the products in bulk to sell to each of them. This is the sort of stuff that has usually been done overseas for the last thirty or forty years. However, as we discussed above, companies can’t rely on overseas production as they used to. They’re quickly coming to realise that having a reliable supply is more important than the small amount of coin they can save with cheaper overseas labour – which isn’t really that cheap anymore.

Since the company went public in 2019 it has had a wild ride. It initially started trading around the $13 mark, however, when the pandemic hit a year later sales fell by more than 30%, profits turned to losses, and the share price fell in half. But things are turning around. Along with the share price. Analysts forecast sales will be up by 33% in 2021 to $476 million, which is a massive bounce back even if they are not quite back to 2019 levels. The same analysts see revenue hitting $612 million in 2022.

Earlier in the year, MEC did a deal with a leading US-based fitness company, rumoured to be Peloton. The exercise bike maker has had a hell of a time getting products out of China and MEC are spending $50 million in a new manufacturing centre to supply the parts they need to build their machines. It’s estimated that the deal could bring in an additional $125 million to sales annually. If this trend continues and more US companies look to stabilise their supply lines in the same way, MEC could be in for a big future.

The share price has had a little bump in recent times. Analysts are starting to realise there may be a big future for the company and others are starting to take notice. I really like the share price around the $15 mark, although it’s a little higher at the moment – currently at $17.75. I’d be looking to see if we can get a little pullback here after the recent run-up and pick it up for a little less. It’s certainly got a bright future if the reshoring continues into 2022 and beyond.