Mayville Engineering Company, Inc. (MEC)

Executive Summary / Key Takeaways

• Mayville Engineering is executing a strategic transformation from a cyclical industrial fabricator to a data center infrastructure supplier, using the $140.5 million Accu-Fab acquisition as the catalyst to access an $8 billion serviceable market with 10-point margin premiums.
• The MBX operational excellence framework has proven MEC can cut costs and improve efficiency (275+ Kaizen events, $5 million savings, 12% headcount reduction), but near-term margin pressure from integration and legacy market weakness masks the underlying earnings power of the new business mix.
• Commercial vehicle demand collapse (-24% in Q3 2025, with ACT Research projecting 28% production decline in 2025 and another 14% in 2026) creates a severe headwind but also provides the opportunity to reallocate underutilized capacity to the faster-growing data center market.
• MEC's pipeline of qualified data center opportunities exceeds $100 million, with $30 million in new project awards in Q3 alone, and management expects this end market to represent 20-25% of revenue by 2026, potentially becoming one of its largest segments.
• The stock trades at 1.18x EV/Revenue, which is at the higher end of the lower half of the peer range (0.6-3.4x for competitors), reflecting execution risk that will be resolved by the speed of the data center ramp and timing of the commercial vehicle recovery.

Setting the Scene: From S-Corp to Public Company Transformation

Mayville Engineering Company, founded in 1945 and headquartered in Milwaukee, Wisconsin, spent its first 77 years as a privately held S Corporation before entering public markets. This heritage as a tax-advantaged, closely held business shaped a culture of operational discipline and customer intimacy that remains embedded in its DNA. The company established itself as a leading U.S.-based, vertically integrated manufacturing partner, offering end-to-end solutions from design and prototyping through fabrication, aluminum extrusion, coating, assembly, and aftermarket components. This full-service model created deep relationships with original equipment manufacturers across heavy- and medium-duty commercial vehicles, construction access equipment, powersports, agriculture, and military markets.

The problem facing MEC in 2025 is that four of its five legacy end markets simultaneously entered severe downturns. Commercial vehicle production is collapsing under the weight of tariff uncertainty and 2027 EPA regulatory changes, with ACT Research projecting a 28% decline in Class 8 production in 2025 followed by an additional 14% drop in 2026. Agriculture is mired in a trough amid elevated interest rates and lower farm income, with management expecting low single-digit declines into 2026. Powersports channels are destocking inventory in response to financing headwinds. Only military and select construction markets show resilience. This cyclical convergence exposed the fundamental vulnerability of MEC's traditional business model: concentration in mature, cyclical industries that move in lockstep.

The solution emerged on July 1, 2025, with the $140.5 million acquisition of Accu-Fab, a precision metal fabricator serving the critical power and data center infrastructure markets. This transaction immediately increased MEC's serviceable addressable market by approximately 60% to $8 billion and introduced a secular growth driver with fundamentally different economics. Unlike traditional markets where projects take over a year to reach production, data center programs can move from bid to revenue in 8-12 weeks. The acquisition also made MEC the largest domestic metal fabricator, with 95% of sales and 92% of sourcing from within the United States, positioning it to benefit from accelerating reshoring trends.

Technology, Products, and Strategic Differentiation: The MBX Moat

MEC's competitive advantage rests on two pillars: vertical integration and the MBX operational excellence framework. The company's ability to manage the entire manufacturing value chain internally reduces dependency on external suppliers, shortens lead times, and enables faster prototyping cycles that OEMs value during product development. This integration is particularly valuable for complex assemblies requiring multiple processes—fabrication, coating, and final assembly—where coordinating across multiple vendors would introduce cost, quality, and timing risks.

The MBX framework, launched in September 2022, represents the systematic application of lean manufacturing principles across MEC's operations. Over 275 Kaizen events have reduced legacy manufacturing square footage by 5%, cut headcount by 12%, and removed more than $5 million in costs. This operational discipline transformed Mid-States Aluminum's adjusted EBITDA margins from approximately 20% to over 30% in just two years, demonstrating the framework's ability to extract value from underperforming assets. The "so what" for investors is clear: MEC has proven it can improve margins even in challenging demand environments, providing confidence that the company can integrate Accu-Fab efficiently and extract promised synergies.

The data center opportunity leverages this operational foundation while offering superior economics. Accu-Fab's Raleigh location was sold out, meaning the $25 million in cross-selling wins MEC secured in Q3—covering battery backup cabinets, static transfer switch components, and busway components—would have been impossible for Accu-Fab alone due to capacity constraints. MEC can produce these higher-margin products (30%+ gross margins) in its existing facilities, particularly leveraging aluminum extrusion capabilities from its Fond du Lac plant. Management estimates that 90% of required assets are already owned, limiting incremental capital expenditures to $15-20 million annually even as data center revenue scales toward $100 million by 2028.

Financial Performance: Margin Pressure Hiding Earnings Power

MEC's third-quarter 2025 results reflect the transitional nature of its transformation. Net sales of $144.3 million increased 6.6% year-over-year, but this headline masks a 9.1% organic decline in legacy businesses offset by the Accu-Fab contribution. Manufacturing margins compressed to 11.0%, down 160 basis points from the prior year period, driven by three factors: $0.6 million in restructuring charges, inventory step-up amortization from the acquisition, and fixed cost under-absorption from soft commercial vehicle demand. The "why this matters" is that these are temporary, one-time, or cyclical headwinds obscuring structural improvement.

The margin story reveals a tale of two businesses. Legacy markets are experiencing severe deleverage as volumes fall faster than costs can be cut. Commercial vehicle sales declined 24% in Q3, and with ACT Research forecasting production to bottom at 205,000 units in 2026, this pressure will persist through at least the first half of next year. However, the data center business carries gross margins approximately 10 percentage points above MEC's historical 15-20% range. As this mix shift accelerates—potentially reaching 20% of revenue in 2026—the blended margin profile should expand meaningfully, particularly in the second half of 2026 as cross-selling synergies fully ramp.

Free cash flow of $16.75 million for the nine months ended September 30, 2025, declined 60.2% from the prior year period, reflecting lower operating earnings and a $3.5 million working capital build to support data center program ramp-up. CFO Rachele Lehr explicitly stated this is a transitional period: "As cash generation strengthens, with the recovery in the commercial vehicle market and continued growth in our high-margin, high-velocity markets, we expect to accelerate debt repayment and return to a net leverage profile consistent with our stated long-term target of below 2.5x." The company repurchased $4.6 million of stock year-to-date, but the primary capital allocation priority is debt reduction, with net leverage of 4.61x as of Q3.

Outlook and Execution: The 2026 Inflection Point

Management's guidance for full-year 2025—net sales of $528-562 million, adjusted EBITDA of $49-55 million, and free cash flow of $25-31 million—reflects conservative assumptions about legacy market recovery. The company withdrew its 2026 Investor Day targets due to macro uncertainty, but the underlying framework remains intact. The critical variable for 2026 is the interplay between commercial vehicle stabilization and data center acceleration.

For the commercial vehicle market, MEC is planning conservatively. Management explicitly stated they have been "burned by this end market in the last 12 months significantly" and are basing forecasts on ACT Research's 205,000-unit projection for 2026, not more optimistic OEM commentary. This creates potential upside if a pre-buy emerges ahead of 2027 EPA regulations or if tariff clarity sparks fleet replacement. However, the base case assumes continued softness through the first half of 2026, with potential improvement in the second half as new programs launch.

The data center trajectory is more certain. MEC expects to recognize $20-30 million in revenue synergies from Accu-Fab in 2026, up from prior expectations of $5-10 million, with the majority impacting Q1 and fully ramping by Q2. This implies the data center end market could reach approximately 20% of total revenue in 2026, assuming commercial vehicle remains at 205,000 units. The 10-point margin premium would contribute roughly 200 basis points of structural margin improvement once fully scaled, though management cautions that transitional costs will pressure margins in the first half of 2026 as resources are reallocated.

Risks and Asymmetries: What Could Break the Thesis

The most material risk is integration execution. Accu-Fab represents MEC's largest acquisition, and the company must simultaneously integrate operations, cross-sell to new customers, and reconfigure production capacity across multiple facilities. While management has proven MBX capabilities, the pace of data center demand requires moving machines between plants, training legacy staff on new products, and maintaining quality standards for critical power applications where failure is not an option. Any stumble could delay the $20-30 million synergy target and erode customer confidence in MEC's ability to deliver.

Customer concentration amplifies cyclical risk. MEC's heavy exposure to commercial vehicle OEMs means that if ACT Research's forecasts prove optimistic—or if the 2027 EPA regulations create production disruptions rather than pre-buys—the company's revenue base could deteriorate faster than data center growth can offset. The agriculture market shows no signs of recovery until potentially mid-2026, and powersports remains highly sensitive to interest rates. A recession that prolongs these downturns could push leverage above covenant levels, though the 4-quarter acquisition holiday provides breathing room.

On the positive side, reshoring trends could accelerate meaningfully if tariffs become structural. MEC's domestic manufacturing footprint provides a durable competitive advantage as OEMs seek to reduce supply chain risk. The company is already seeing increased RFQs for aluminum fabrications and is in active discussions with customers repositioning their supply chains. If this trend accelerates, MEC could win incremental business beyond current guidance, particularly in construction and access equipment where nonresidential and data center construction drive demand.

Competitive Context: The Domestic Fabrication Landscape

MEC competes against a fragmented group of mid-sized contract manufacturers, with four publicly traded peers providing useful benchmarks. Park-Ohio Holdings (PKOH) operates a similar model but with greater scale ($1.59 billion revenue) and logistics expertise, trading at 0.62x EV/Revenue with 16.8% gross margins—both superior to MEC's current metrics. However, PKOH's higher debt-to-equity ratio (1.87x vs. MEC's 1.02x) and exposure to automotive cyclicality create comparable vulnerabilities.

Standex International (SXI) represents the high-end of the spectrum, with 40% gross margins and 13.3% operating margins driven by electronics integration and specialty products. SXI trades at 3.48x EV/Revenue, reflecting its diversified, higher-margin profile. MEC's data center pivot aims to close this gap by moving into technology-driven fabrications with 30%+ gross margins, but it currently lags in scale and product sophistication.

NN Inc. (NNBR) and L.B. Foster (FSTR) show the challenges facing traditional fabricators. NNBR operates at negative operating margins (-2.16%) and trades at just 0.61x EV/Revenue, reflecting its struggles with customer concentration and restructuring costs. FSTR, while profitable with 6% operating margins, grows slowly (1.12% in Q3) and trades at 0.72x EV/Revenue. MEC's advantage lies in its operational discipline and strategic timing: while peers struggle with cyclical headwinds, MEC is investing in secular growth.

The key differentiator is MEC's domestic footprint. With 95% of sales and 92% of sourcing from the United States, MEC is the purest play on reshoring among its peers. PKOH and SXI have more global exposure, while NNBR's international operations create additional complexity. As OEMs accelerate supply chain repositioning due to trade policy changes, MEC's U.S.-based capacity becomes a strategic asset that can command premium pricing and win share from imports.

Valuation Context: Pricing in Execution Risk

At $18.63 per share, MEC trades at a market capitalization of $412.1 million and an enterprise value of $627 million, reflecting a net debt position of $214.9 million. The valuation multiples embed significant skepticism about the company's ability to execute its transformation. EV/Revenue of 1.18x sits at the high end of the lower half of the peer range (0.6-1.2x for PKOH and FSTR) but well below SXI's 3.48x, suggesting the market is giving partial credit for the data center opportunity while remaining cautious about legacy market exposure.

EV/EBITDA of 13.47x appears elevated relative to PKOH's 8.54x and FSTR's 11.05x, but this reflects depressed EBITDA from integration costs and cyclical under-absorption. On a forward basis, if MEC achieves the midpoint of 2025 guidance ($52 million EBITDA) and data center synergies contribute incremental margin in 2026, the multiple would compress to approximately 10x—more in line with peers while offering superior growth potential.

Cash flow metrics tell a more nuanced story. Price-to-free-cash-flow of 7.22x and price-to-operating-cash-flow of 5.99x suggest the market is undervaluing MEC's cash generation capabilities, particularly given the temporary nature of working capital build and restructuring costs. The company's 44% adjusted EBITDA-to-free-cash-flow conversion in Q1 and 92% in Q2 demonstrate strong underlying cash conversion that should normalize as integration costs fade.

The balance sheet presents the primary constraint. Net leverage of 4.61x exceeds management's long-term target of 1.5-2.0x and consumes financial flexibility. However, the 4-quarter acquisition holiday in the credit agreement (allowing maximum net leverage of 4.0x) provides breathing room, and management's commitment to debt reduction is explicit. If MEC generates $25-31 million in free cash flow in 2025 and allocates it primarily to debt paydown, leverage could approach 3.0x by year-end 2026, assuming modest EBITDA growth from data center scaling.

Conclusion: A Transitional Story with Asymmetric Upside

MEC stands at an inflection point where operational excellence meets strategic transformation. The company's 80-year heritage in domestic manufacturing provides the foundation, the MBX framework demonstrates the capability to extract efficiency, and the Accu-Fab acquisition opens a secular growth market with superior economics. While legacy market cyclicality creates near-term headwinds and margin pressure, this same weakness provides the capacity to serve accelerating data center demand without major capital investment.

The central thesis hinges on execution velocity. If MEC delivers the $20-30 million in data center revenue synergies in 2026 while maintaining operational discipline, the mix shift toward 30% gross margin business could drive 200-300 basis points of structural margin expansion by 2027. This would validate the acquisition premium and position the company for sustained growth. Conversely, integration missteps or a deeper-than-expected CV downturn could pressure leverage and limit strategic flexibility.

For investors, the stock prices in execution risk but offers asymmetric upside. Trading at 1.18x EV/Revenue with a clear path to higher-margin revenue growth, MEC's valuation is reasonable relative to peers if the transformation succeeds, but punitive if it fails. The key variables to monitor are Q1 2026 data center revenue ramp and commercial vehicle production stabilization. If both trend positively, the market will be forced to re-rate MEC toward SXI's multiple levels, implying 50-100% upside. If not, the company's domestic manufacturing moat and operational discipline still provide a floor, albeit at lower valuation multiples.