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Chuck Royce's Firm Starts to Unhitch Miller Industries Position

Small-cap specialist curbs investment in towing equipment manufacturer

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May 12, 2022
Summary
  • The holding was reduced by 36.08%.
  • The tow truck manufacturer reported revenue growth for the first quarter.
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Royce Investment Partners revealed earlier this week it trimmed its stake in Miller Industries Inc. (

MLR, Financial) by 36.08%.

The New York-based firm, which was founded in 1972 by

Chuck Royce (Trades, Portfolio), specializes in small-cap companies. The portfolio management team picks stocks based on an active, bottom-up, risk-conscious and fundamental approach. They also search for value opportunities among companies trading at a discount to enterprise value.

According to Real-Time Picks, a Premium GuruFocus feature based on 13D and 13F filings, the firm sold 555,500 shares of the Ooltewah, Tennessee-based company on April 30. The stock traded for an average price of $26.81 per share on the day of the transaction.

The firm now holds 984,332 shares total, accounting for 0.22% of the equity portfolio. GuruFocus estimates Royce has gained 13.23% on its long-held investment.

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The company, which manufactures vehicle towing and recovery equipment under the Century, Vulcan, Chevron and Holmes brands, among others, has a $279.83 million market cap and an enterprise value of $264.79 million; its shares were trading around $24.46 on Thursday with a price-earnings ratio of 18.42, a price-book ratio of 0.97 and a price-sales ratio of 0.37.

The GF Value Line suggests the stock is modestly undervalued currently based on historical ratios, past financial performance and future earnings projections.

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On May 4, Miller Industries reported its first-quarter 2022 financial results. It posted net income of $2.1 million, or earnings of 18 cents per share, both of which were down from the prior-year quarter. Revenue grew 26.9% to $215.5 million.

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In a statement, CEO William G. Miller II noted he was “pleased” with the revenue growth.

"While persistent supply chain challenges and inflationary pressures impacted our bottom line, we have already enacted a series of price increases and material surcharges to mitigate these impacts that should begin to yield results as we move through the remainder of the year,” he said. “As we work through our substantial backlog, we are encouraged by our order levels and continued strong demand for our products. We plan to continue our strategy of building up inventory in order to mitigate the risk of supply chain delays and quickly complete finished goods once all component parts have been received.”

The company also announced a quarterly cash dividend of 18 cents per share, which will be paid on June 13 to shareholders of record as of June 6.

GuruFocus rated Miller’s financial strength 9 out of 10, driven by adequate interest coverage and a high Altman Z-Score of 3.66 that indicates it is in good standing even though assets are building up at a faster rate than revenue is growing. The return on invested capital is also eclipsed by the weighted average cost of capital, meaning the company is struggling to create value while growing.

The company’s profitability also fared well, scoring an 8 out of 10 rating. In addition to a declining operating margin, the returns on equity, assets and capital are underperforming over half of its competitors. Miller is also being weighed down by a low Piotroski F-Score of 2 out of 9, which means business conditions are in poor shape. Despite recording consistent earnings and revenue growth, the predictability rank of 2.5 out of five stars is on watch. GuruFocus research found companies with this rank return an average of 7.3% annually over a 10-year period.

Despite the reduction, Royce’s firm remains Miller Industries’ largest guru shareholder with 8.62% of its outstanding shares. Other guru investors are Hotchkis & Wiley,

Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Robert Olstein (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio) and Diamond Hill Capital (Trades, Portfolio).

Portfolio composition and performance

Over half of Royce Investment Partners’ $11.78 billion equity portfolio, which the 13F filing showed was composed of 959 stocks as of the end of the first quarter, was invested in the industrials, technology and financial services sectors, followed by a slightly smaller exposure to the consumer cyclical space.

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Other vehicle and parts companies the firm held as of March 31 included Standard Motor Products Inc. (

SMP, Financial), Dorman Products Inc. (DORM, Financial), Brunswick Corp. (BC, Financial), LCI Industries Inc. (LCII, Financial) and Asbury Automotive Group Inc. (ABG, Financial).

According to the firm’s website, the Royce Premier Fund posted a return of 16.36% in 2021, underperforming the S&P 500 Index’s 28.7% total return.

Investors should be aware that the 13F filings do not give a complete picture of a firm’s holdings as the reports only include its positions in U.S. stocks and American depository receipts, but the reports can still provide valuable information. Further, the reports only reflect trades and holdings as of the most-recent portfolio filing date, which may or may not be held by the reporting firm today or even when this article was published.

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Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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