Q1 Update
MPAA 0.00%↑ Q1 sales declined and came in below expectations. Given high customer concentration this type of lumpiness shouldn’t be surprising even with smoother sell through, but it creates uncertainty and public markets discount this. Along with this, MPA is in the middle of making big inventory investments to meet the coming demand, so the company is using cash. This combination of declining sales and net cash outflows over the past few quarters is almost certainly putting pressure on the stock.
Management didn’t explicitly blame the top line decline on weather, but that seems to be the most likely reason, along with a difficult comp in Q1 of FY26. The decline was driven entirely by the rotating electrical segment. Rotating electrical revenue fell 21.6% year over year while brake related revenue increased 16.9% year over year. Rotating electrical sales are sensitive to weather as demand increases in extreme heat and cold weather so the mild spring/early summer led to demand softness in Q1. This dynamic can rebound if weather is hotter later in the summer, which is exactly what has happened this year starting in July. O’Reily and Advance have confirmed this dynamic. Autozone will report its Q4 in September, which will cover the hotter part of the summer.
Large sequential growth from Q1 to Q2 in MPA’s rotating electrical segment has happened in the past and looking at those periods is informative when forecasting Q2 of FY27. FY24 had a very similar situation as mild weather in spring/early summer preceded a very hot July which led to sequential growth in rotating electrical of 29% in Q2. With similar 29% sequential growth in rotating electrical and something like 15-20% sequential growth for brake revenue, Q2 of FY27 revenue could be somewhere between $200m to $210m. This would be about flat against the prior year period revenue when excluding the $14.8m of core revenue recognition from that period, and would be growth when excluding tariff related price increases that are not included in guidance.
Consensus is at $204m for Q2 so revenue around there wouldn’t be a huge surprise, but given last quarter’s miss, and last year’s downward revision, it’s good to know there’s precedent for sequential growth of this magnitude.
Importantly, Q2’s adjusted gross margin was solid despite only 58% of revenue coming from rotating electrical, the higher margin segment historically. For reference gross margin hovered around 30% when it was only a rotating electrical business. MPA disclosed the FX effect on gross margin for the first time this quarter and with that adjustment along with other one-time and non-cash expenses, adjusted gross margin was 22.2%.
When normalizing past reported gross margins with estimates for FX adjustments based on USD/MXN moves, a 22.2% gross margin is around where it has been when rotating electrical accounted for 65-68% of revenue. Additionally, this quarter had lower total revenue thus lower absorption, which also makes this quarter’s gross margin look better.
In summary, the quarter looked bad due to the miss and the steep top-line decline but it fits in with the guidance picture and seems to show that the operational efficiency measures the company has been taking are bearing fruit.
Tea Leaves
MPA recently changed its logo on multiple social media platforms. The logo is quite noticeable given its divergence from its past logo. I’m keeping an eye on whether there are other significant changes in corporate identity/messaging in the coming weeks and months because it could point to the company better positioning itself for a sale process. There’s plenty of literature out there on how a corporate rebranding a year or two prior to starting a sale process can enhance value and there are also many examples of public companies refining their corporate messaging and branding prior to the company being acquired. While this line of thinking is definitely a stretch, it lines up well with what I think would be a good time to sell the company as new business from First Brands and Centric would be reflected in its financials, and Joffe’s employment agreement was just extended to July 2029.
*As I was writing this, MPA made a LinkedIn post highlighting its new messaging and logo. While the post seems like it was written by AI, I think this provides some support to my point above and could indicate a desire that the board and management want to better position the company to potential buyers.
Valuation
The new business gained from First Brands and the expected new business from the Centric acquisition have raised my estimate on a fair target price. Assuming management’s $900m annualized revenue run rate is accurate and an additional ~$100m is gained from Centric, it doesn’t look like a stretch for the company to approach $1b in revenue in FY2029. With some margin expansion, and a 6.5x multiple, $37 per share looks like a fair acquisition price in 2 years. This would also imply a 19x FCFE/share multiple given FCFE/share of $2.00 in FY2029. This looks steep but is more fair when considering the higher mix of DIFM that will come with the new business/Centric, a more even split between rotating electrical and brake parts, greater scale, and higher margins. I’d also refer you to my past write ups on MPA which cover precedent acquisitions and justify the 6.5x acquisition multiple.
This would provide a ~75% IRR over the next 2 years from today’s price. That type of return always seems unlikely, but given public market skepticism over the lumpy nature of the business, customer concentration, the lack of close public comps, poor governance, the lack of GAAP earnings, and complex accounting, I think it’s reasonable to believe this opportunity can exist.
Disclosure: This content is for informational purposes only and does not constitute investment advice. The author may hold positions in the securities discussed.