Mistras Group (MG) 22Q2 Update

Mistras Group reported 22Q2 EPS of $0.15, below 21Q2’s $0.20 and my estimate of $0.18.  Revenues of $179.0 million were 0.8% above the year earlier period and also below my expectations.  While revenues were essentially flat, gross margin was lower and SG&A expense higher than the prior year.  Income from operations declined 5.4%.

Despite the lower-than-expected revenue and earnings, management reaffirmed its full year guidance, saying that it would post better 22H2 results, as some projects that had been expected in 22Q2 come through in the second half, recent price increases take full effect and a more favorable sales mix boosts profit margins.

Management is pleased with the progress of its growth initiatives, including its OneSuite analytics platform, which now offers 90 applications to 40 customers at 150 sites, and Sensoria, its wind turbine blade monitoring solution that has 100 wind turbines under contract.  It has also announced record results for Onstream, its inline pipeline monitoring system acquired in 2019.

In July, Mistras expanded its credit facility from $250 million to $350 million and negotiated more flexible covenants, giving it greater capacity to pursue acquisitions, which are increasingly likely for 2023.

My projections anticipate full year revenues of $700.7 million, adjusted EBITDA of $66.9 million, and free cash flow of $28.8 million, all within management’s guidance.  Projected 2022 EPS is $0.40.  The projections anticipate an improving outlook for the economy and some reduced headwinds from the unfavorable foreign currency effects.

For 2023, I now forecast revenues of $727.1 million, up 3.8% and EPS of $0.60.  The 50% increase in projected 2023 EPS over 2022 is due mostly to expectations of improved operating margins, lower interest expense and a lower tax rate.

The stock has underperformed the market this year, but its relative performance has improved since May.  Despite reporting the disappointing 22Q2 earnings, the stock has held its ground since the announcement, helped by a rising stock market.

Under the assumption that Mistras will deliver on its revenue and earnings guidance, I have raised my price target modestly to $7.40 from $7.00.  The new PT is based upon applying a one-year forward P/E multiple of 12.4, below the current one-year forward multiple of 16.3, to 2023 projected earnings of $0.60.  It represents a potential 6-12 month return of 14.7%.  I am therefore maintaining my rating of outperform on Mistras’s stock.

This is a summary of my recent update report on Mistras Group, Inc. (MG). To obtain a copy of the full report, please reach out to me using the contact information provided below.

Subsequent News: On August 16, the Houston Chronicle reported that Baker Hughes Company (BKR) plans to acquired Quest Integrity, a pipeline inspection company and subsidiary of Team, Inc. (TISI), an MG competitor. The $280 million acquisition includes Team’s Invista tube inspection technology, which detects corrosion and deformation in pipelines and other pipes, utilized in the petrochemical and refining industries. The acquisition is expected to close later this year.

August 12, 2022 (Subsequent News dated as of August 19, 2022.)

Stephen P. Percoco
Lark Research
839 Dewitt Street
Linden, New Jersey 07036
(908) 975-0250

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