Description

Important Disclosures: Certain funds and accounts managed by us and our affiliates are currently short Myers Industries, Inc. (MYE).  We may short and/or cover shares of MYE in the future for the funds and accounts managed by us without notice, and we are under no obligation or agreement to take, or not take, any action or restrict our actions in any manner.  This is not a recommendation to short or cover shares. Our views are subject to change without notice and we may trade in any manner, whether consistent or inconsistent with this investment thesis.  The information below is from public sources. We have not independently verified this information and we make no representations as to the accuracy or correctness of any such information. We undertake no obligation to update any information below.

Business Description

Myers (MYE) is an international manufacturer of polymer products for industrial, agricultural, automotive, commercial and consumer markets. MYE is also the largest distributor of tools, equipment and supplies for the tire, wheel, and under vehicle service industry in the U.S. MYE reports two business segments along these lines: Materials Handling (~72% of 2017 consolidated sales) and Distribution (~28% of 2017 sales). Basically, the Materials Handling business makes a variety of mainly plastic and some metal containers. Some of these containers are somewhat specialized (see Jamco http://industrialcarts.jamcoproducts.com/category/all-categories-safety-flammable-cabinets) and others are very commoditized (see Scepter portable fuel containers http://www.myersindustries.com/Business-Strategy-Brands/Product-Brands/Scepter.aspx).

We believe MYE is significantly overvalued given its mediocre business quality and limited growth prospects. MYE is not necessarily a bad business but it is far from a great one. We often consider a company’s gross margin as an important indicator of business quality. The company’s gross margins have been flat for the past five fiscal years, averaging 29%. To be fair, MYE’s distribution business probably earns lower gross margins than its manufacturing business, but the company does not provide that detail in its financials. Materials Handling had a segment level Adjusted Operaing Income margin of ~11% vs. Distribution's <6% Adjusted Operating Income margin in 2017. Still, we consider gross margins of not quite 30% to be indicative of a so-so business.

Revenue growth has been hard to come by for MYE. Quarterly revenue declined for seven quarters in a row from the fourth quarter of 2015 to the second quarter of 2017. Revenue grew in the last two quarters of 2017, but an unspecified amount was due to the impact of hurricanes (think portable fuel tanks) and “one-time large orders.” In fact, the company’s guidance of low to mid-single digit revenue growth for 2018 illustrates how ephemeral its 10% second half 2017 growth was.

MYE has not been able to grow Adjusted EBITDA over the past five years. Tracking Adjusted EBITDA over multiple years is made challenging by changes in the company’s portfolio. However, by our analysis Adjusted EBITDA in 2017 under management’s definition was 10% lower than it was in 2013. In early 2017, management sold investors on a plan to more than double its operating income margins by 2020 compared to 2016, leading to over 25% Adjusted EBITDA growth. (See 3/09/17 press release.) Suffice it to say that no progress was made in 2017 towards those targets.

Only two sell-side analysts have published any forward estimates for the company, which I have reflected in the VIC table at the top. These are not our estimates - we do not buy into the company's margin expansion forecast. One redeeming facet of the company is its cash flow generation as the company has significant D&A and has cut back on Capex. Free cash flow (Cash from Ops - Capex) spiked in 2017 on much reduced Capex (down 53% from 2016) and a swing in the change in working capital from a use of ($11.5) MM in 2016 to a source of $11.9MM in 2017. We are dubious that the company can repeat 2017's FCF generation. Using average FCF for the past three years, MYE trades at a FCF yield below 4%.

Surprisingly, this mediocre company with unexceptional topline growth and no EBITDA growth is trading at a low teens multiple of forward EBITDA. Its EBITDA multiple is nearly 3.5 turns higher than its plastics and packaging peer group. Revenue growth estimates for MYE are slightly below its peer group and its trailing Adjusted EBITDA margins are 300 basis points lower than its peers. Frankly, we don’t understand the love the market is showing for the company and expect to see the stock come back down to earth in coming quarters.

Catalyst

Slowdown in sales growth; lack of margin expansion.