Mistras Group (MG) 23Q1 Update

Mistras Group reported a 23Q1 loss of $0.17, slightly better than 22Q1’s $0.18 loss, but wider than my estimate of a $0.08 loss.  Revenues of $168.0 million were 3.9% above 22Q1’s $161.7 million and also above my estimate of $166.0.  Excluding the impact of unfavorable foreign exchange, the YOY increase in revenue was 5.5%.

Gross profit rose 15.5% with gross margin up 270 bp to 27.4%.  MG’s SG&A expense was up slightly, but its SG&A expense ratio declined 50 bp to 25.5%.  The company also recorded $2.1 million of reorganization and other costs.  Overall, Mistras’s loss from operations narrowed sharply from $4.7 million in 22Q1 to $1.8 million in 23Q1.  This was due to the higher gross profit, partially offset by higher SG&A expense and reorganization costs. It also recorded a $1.0 million favorable swing in income tax expense due to R&D tax credits.

The profit improvement was matched by an $8.7 million positive swing in free cash flow.  23Q1 free cash flow (defined as CFOA plus CFIA plus currency) was $0.2 million compared with last year’s $8.5 million cash burn.  Even so, MG’s free cash flow fell short of my projections.

Management’s guidance is unchanged.  It expects 2023 revenues of $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%.  Based upon the wider-than-expected 23Q1 loss, I have reduced my 2023 earnings estimate to $0.40 from $0.44, but my estimates for all other metrics – revenues, EBITDA and free cash flow – are little changed and in line with guidance.  For 2024, I now project EPS of $0.64, up from $0.63 previously.

Since my last report, MG’s stock has fallen 7.0%, compared with the S&P SmallCap 600’s 3.6% gain.  The decline follows the stock’s sharp run-up from late March to early May.  Following this recent decline, the stock is still up 48.5% year-to-date, much better than the SmallCap 600’s 3.8% advance.

Despite the 23Q1 earnings shortfall, my price target of $8.40 is unchanged.  It represents an anticipated one-year forward multiple of 13.2 applied to projected 2024 EPS of $0.62.  From MG’s current share price of $7.32, the price target represents a potential total return of just under 15%.

I am still waiting for this year’s sharp rebound in the share price to be confirmed by a commensurate improvement in the company’s financial performance.  First quarter results provide only partial confirmation, so management’s reaffirmation of its 2023 guidance shifts the anticipated improvement more to the back half of the year (according to my projections).  My 2024 EPS projection also anticipates further improvement from 2023.  Accordingly, while the potential total return is attractive, I am for now 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.

June 16, 2023 (Report date is June 10, 2023.)

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

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