Mistras Group reported 22Q4 EPS of $0.09, above 21Q4’s $0.00 and my estimate of $0.02. Revenues of $168.2 million were 1.7% below 21Q4’s $171.2 million and also below my estimate of $171.4. The results met management’s top line and exceeded its bottom-line guidance.
Gross profit rose 2.7% with gross margin up 130 bp to 30.3% the second consecutive quarter above 30%. SG&A expense eased 1.1% but increased 10 bp as a percent of revenue to 25.1%. Income from operations more than doubled to $5.8 million from $3.2 million, due to the higher gross profit, lower SG&A expense and non-repeat of last year’s $1.0 million legal settlement and litigation costs. The company also recorded a $1.0 million favorable swing in income tax expense due to R&D tax credits.
However, the improvement in profitability was not matched by an improvement in free cash flow. For the quarter, free cash flow (defined as CFOA plus CFIA) was $14.0 million, compared with $15.9 million in 21Q4. For the full year, free cash flow was $12.7 million vs. $21.6 million.
Management has set 2023 guidance for revenues at $710-$760 million, up 3%-11% from 2022, adjusted EBITDA at $70-$75 million, up 20%-29% and free cash flow of $30-$33 million, up 130%-150%. I have raised my projections to be in line with that guidance. My model now shows revenue of $713 million, EBITDA of $65.5 million (which does not add back stock compensation costs of $5.6 million) and free cash flow of $30.4 million. That produces 2023 EPS of $0.44, more than double 2022’s $0.21. For 2024, I currently project EPS of $0.63, up 43%, which assumes further improvement in performance.
The company has hired AlixPartners to conduct Project Phoenix, an operational review that aims to accelerate profitable growth and achieve sustained cost savings. CEO Dennis Bertolotti has assumed the responsibilities of Chief Operating Officer Jonathan Wolk, who left the firm in February.
Since my last report, MG’s stock has surged 86%, compared with the S&P SmallCap 600’s 4.8% decline. Half of the gains occurred after the company reported 22Q4 results in early March.
With the better-than-expected 22Q4 performance and upward revision of my EPS projections, I have raised my price target from $5.00 to $8.40. The price target represents a one-year forward multiple of 13.3 times projected 2024 EPS of $0.63. That is below MG’s current one-year forward multiple of 17.6 times and also below the peer group average (of 14 small-cap mainly oilfield service providers) of 17.0 times. From the current quote of $7.80, my price target represents a potential total return of 7.7%. Accordingly, I am maintaining my neutral rating on the stock.
This is a summary of my recent 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.
April 26, 2023
Stephen P. Percoco
Lark Research
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