Mayville Engineering Company (MEC) just delivered a solid Q1 2024 earnings report, exceeding revenue expectations and demonstrating impressive free cash flow generation. Analysts are understandably focused on the macro headwinds facing several of MEC's key end markets, including commercial vehicles and agriculture. However, buried within the transcript lies a potentially explosive story – a story of stealth capacity expansion that could propel MEC to outsized growth when these cyclical markets inevitably rebound.

While everyone's eyes are on Hazel Park, MEC's shiny new $100 million revenue-generating facility slated for full ramp-up by year-end, the real story might be playing out across the rest of MEC's manufacturing footprint. Jag Reddy, MEC's President and CEO, subtly revealed a crucial detail: they've been quietly unlocking capacity in their existing plants through a relentless focus on operational efficiency.

Think of it like this: MEC is effectively building a "shadow factory," not with bricks and mortar, but by optimizing their existing assets. This strategy, hidden in plain sight within the transcript, could be far more significant than analysts currently realize.

Reddy highlighted this phenomenon during the Q&A session, stating, "Some of our large plants, such as Mayville and the Defiance, have had just historically impressive volumes, revenues, and EBITDA margins, and EBITDA dollars in our history of 79 years." This statement underscores the fact that MEC is squeezing out significantly more production from the same physical assets.

The driver behind this efficiency revolution is MEC's MBX program, a lean manufacturing framework that's driving a relentless focus on waste reduction and process optimization. Reddy detailed their commitment to this approach, describing how he and the leadership team spent a full week on the plant floor participating in Kaizen events. These events involve meticulous process mapping, time studies, and cell redesign to eliminate inefficiencies and unlock hidden capacity.

The numbers speak for themselves: over the last five quarters, MEC has executed over 150 MBX Kaizen events. This dedication to operational excellence has yielded tangible results, with a 100 basis point improvement in manufacturing margin directly attributed to MBX in Q1 alone.

But the real payoff of this "shadow factory" strategy lies in its potential for future growth. By expanding capacity within their existing footprint, MEC avoids the capital expenditures and time lags associated with building new plants. When demand rebounds in their cyclical end markets, MEC will be poised to capitalize, leveraging this newly unlocked capacity to secure market share and drive outsized revenue growth.

Hypothetical Impact of MBX on Revenue and EBITDA

Based on management's commentary, let's hypothesize a conservative 5% capacity increase across MEC's non-Hazel Park facilities due to MBX initiatives. Using their 2023 revenue of $588 million, this translates to roughly $29 million in potential incremental revenue. Assuming a conservative 12% EBITDA margin on this incremental revenue, that's an additional $3.5 million in EBITDA – a figure not explicitly factored into analyst models.

Commercial Vehicle Production Forecast (ACT Research)

The chart below shows ACT Research's forecast for Class 8 vehicle production, a key indicator for MEC's Commercial Vehicle segment. While a decline is expected in 2024, a strong rebound is projected for 2025 and 2026, highlighting the cyclical nature of this market.

This "shadow factory" strategy, while not explicitly highlighted by management, offers a compelling investment thesis for MEC. It provides a powerful growth engine that's largely invisible to the market, poised to deliver outsized returns when cyclical headwinds subside.

"Fun Fact: Mayville Engineering started in 1945, making parts for refrigerators. Today, they build components for everything from massive commercial trucks to nimble all-terrain vehicles – a testament to their adaptability and commitment to innovation."

As investors navigate a turbulent market landscape, it's often the hidden gems that offer the most compelling opportunities. Mayville Engineering, with its under-the-radar capacity expansion story, may be one such gem waiting to be unearthed.