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Tuesday, March 24,
1998
Miller Industries
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Phone: 770-988-0797
Price (3/23/98): $7 3/4
HOW DID IT FIND TROUBLE?
Towing equipment maker, distributor, and towing service consolidator Miller
Industries was the very first stock
written up
for the Daily Double column in early 1997. At that time the company was on
a roll, having risen from its IPO price of $2.30 to a high near $23. After
that column appeared, the stock promptly dropped to $9 and change under the
weight of overvaluation.
Buyers piled back in on news of continued acquisitions and the stock moved
back to $18 3/4. But then in mid-summer a series of negative announcements
and news items began.
First of all, Forbes profiled the company and suggested the strategy
of buying up towing companies might ultimately cost the company wrecker sales.
Competitors might not be as inclined to buy Miller trucks.
In September the company announced first quarter earnings right on target
but warned of slowing truck sales. This news yielded brokerage downgrades
and led to a collapse in the price of the stock.
In January the company disclosed that it was warned of a Justice Department
investigation into the towing industry raising anti-trust concerns. To top
it off, in late February the company announced that third quarter earnings
wouldn't meet analysts' expectations -- adding to the Trouble.
BUSINESS DESCRIPTION
Miller Industries is the largest manufacturer of towing equipment in North
America, and it also has a significant portion of the European market. Miller
towing equipment is sold under the Century, Champion, Holmes, Eagle, and
Vulcan brand names.
In addition, Miller's RoadOne subsidiary is one of the country's largest
providers of towing services. RoadOne has been growing steadily by acquiring
smaller towing operators. In the third quarter alone, the company acquired
towing companies with sales totaling $19 million.
FINANCIAL FACTS
Income Statement
12-month sales: $362.4 million
12-month income: $13.8 million
12-month EPS: $0.31
Profit Margin: 3.8%
Market Cap: $358.8 million
Balance Sheet
Cash: $5.3 million
Current Assets: $145.1 million
Current Liabilities: $62.6 million
Long-term Debt: $66.4 million
Ratios
Price-to-earnings: 25
Price-to-sales: 0.99
HOW COULD YOU HAVE SEEN IT COMING?
There has been lots of news concerning Miller. The company was the subject
of negative reports by David Tice of Behind the Numbers and by the
Off Wall Street Consulting Group in early 1997, and the negative Forbes
column in the summer of 1997. The company itself warned of trouble in
the fall. Even though some of the damage was done immediately after that
announcement, an investor bailing out at that point would have been several
bucks ahead.
Additional warnings were posted on the Miller Industries
message
boards. Very clear evaluations of the potential trouble hidden in Miller's
business model were posted on a couple of occasions. The problem Miller still
faces is an angry group of competitors unwilling to buy its towing equipment.
The most bullish news item regarding Miller came in the form of heavy insider
buying after the September sell off. However, in this case, the insiders
lost along with the rest of Miller investors.
WHERE TO FROM HERE?
The company puts some of the blame for the poor third quarter squarely on
the shoulders of El Nino. The unusually mild winter meant fewer tows. If
that is indeed the problem, the company could bounce back quickly. However,
the past two earnings reports have shown negative year-over-year earnings
growth, not the stuff of stock price appreciation.
On a historical basis Miller looks cheap. It now sells for only 2 times book
value, 1 times sales, and at a PE of 25, near its lowest level in years.
The company is expected to earn $0.41 next year and analysts estimate long-term
growth at 28%. This would pin "fair value" on the basis of a YPEG at $11
or so. However, investors should take into account that analysts have been
consistently cutting earnings estimates of late.
Miller's strategy of consolidating the equipment and service side of the
towing industry has appeal, but there are also pitfalls. Among the pitfalls
is the alienation of potential customers. If Miller can only sell trucks
to itself, margins mean very little. An investor would be prudent to wait
for a more consistent demonstration of this strategy's success before hitching
on to Miller's stock.
-Mark Weaver
([email protected])
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