Mistras Group reported 23Q2 EPS of $0.01, below 22Q2’s $0.15 and my estimate of $0.18. Revenues of $176.0 million were down 1.7% vs. 22Q2’s $179.0 million and also below my estimate of $186.1 million. The shortfall was attributed to a delay on a key defense contract.
Gross profit fell 7.2%, as gross margin fell 170 bp to 28.2%. SG&A expense rose 2.0%, with the SG&A expense ratio up 90 bp to 23.6%. MG recorded another $1.2 million of reorganization costs and $150 million of legal settlement costs. R&E expense declined 2.1% to $511 million. Thus, income from operations fell 59.3% to $3.9 million, below my estimate of $11.6 million. Interest expense was also higher than anticipated. Adjusted EBITDA of $15.3 million fell short of my projection of $21.4 million. Free cash flow (according to MG’s definition) was nearly $8 million, above my estimate of $4.6 million, due to a (likely one-time) benefit from a reduction in days sales outstanding (DSO) of accounts receivable.
Mistras is moving forward with Project Phoenix, its restructuring initiative, in consultation with Alix Partners. To date, it has identified $6.2 million of annualized cost savings, $5.1 million of which are expected to be realized this year. It is now validating the next round of actionable initiatives and will provide a progress update in its 23Q3 earnings announcement. With most of the $6.2 million of targeted cost savings already in process, the next round could conceivably identify additional savings. However, MG will also likely incur additional restructuring costs for the balance of 2023 and perhaps in 2024.
With the disappointing 23Q2 results, management has lowered its expectations for 2023. It now expects revenues of $700-$720 million (vs. previous guidance of $710-$760 million); adjusted EBITDA of $68-$71 million (vs. $70-$75 million) and free cash flow of $23-$25 million (vs. $30-$33 million). Based upon management’s outlook, I now project 2023 revenues of $708.5 million, adjusted EBITDA of $68.2 million and free cash flow of $24.5 million. My forecast produces 2023 GAAP EPS of $0.23, down from $0.40 previously. For 2024, I now project EPS of $0.54, down from $0.64.
Since the earnings announcement on August 2, MG’s stock has fallen 26.4% to $5.70. With the reduced earnings expectations, I have lowered my price target from $8.40 to $7.00. The revised price target equates to a valuation multiple of about 13 times projected 2024 EPS of $0.54. That represents a potential return of nearly 23% from the current quote.
This is a summary of my latest report on Mistras Group, Inc. (MG), which was originally published on August 19, 2023. To obtain a copy of the full report, please reach out to me using the contact information provided below.
August 21, 2023
Stephen P. Percoco
Lark Research
839 Dewitt Street
Linden, New Jersey 07036
(908) 975-0250
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