Mistras Group reported 23Q3 EPS of ($0.34) vs. 22Q3’s $0.14 and my estimate of $0.19. The net loss was due to a $13.8 million goodwill impairment charge taken against its International business and $2.7 million of reorganization charges associated with Project Phoenix. On an after-tax basis, these charges reduced EPS by $0.52. Excluding the charges, Mistras’s adjusted EPS was $0.18.
23Q3 revenues of $179.4 million were up 0.5% vs. 22Q3, but below my estimate of $186.7 million. My projections for 23Q3 and 23Q4 were consistent with previous guidance. However, management has reduced its guidance for full year revenues from $700-$720 million to $695-$705 million. 23Q4 revenues are expected to be somewhere between $172-$182 million, up 2.2%-8.2% YOY. Given its recent performance and the ongoing pressures affecting certain segments of its business, It seems more likely that 23Q4 revenues will be in the lower half of that guidance range. Similarly, even though Mistras achieved its 23Q3 adjusted EBITDA guidance, it lowered its full year outlook by $3 million to $65-$68 million. It also reduced its full year free cash flow guidance from $23-$25 million to $7-$10 million, due to an expansion in accounts receivable and higher anticipated cash costs associated with Project Pheonix.
Although Project Phoenix is substantially complete, it is possible that restructuring charges will persist into 2024. Nevertheless, management is anticipating a significant improvement in the company’s profitability in 2024. It expects that revenues will be up by a modest single-digit percentage; but adjusted EBITDA will improve by one-third or better, from $66.5 million (at the mid-point of its current 2023 guidance) to $88 million or more.
That is a pretty big jump on only a modest increase in revenues. If achieved, Mistras’s adjusted EBITDA margin would increase from about 9.4%-9.7% in 2023 to over 12% in 2024, which seems optimistic. Given the company’s recent history of falling short of guidance (and thus reducing its outlook repeatedly throughout the course of the year), it seems prudent to be cautious about its 2024 forecast. Furthermore, while it may be possible to achieve its (presumably non-GAAP) 2024 earnings target, it is not clear whether the improved results would be sustainable. I anticipate a substantial improvement in 2024 earnings (nearly doubling on a non-GAAP basis); but below MG’s implied forecast.
Still, investors liked what they heard. Since the Nov. 2 earnings announcement, MG’s stock is up 23.7%, better than the S&P SmallCap 600’s 9.7% advance. Although the stock has recovered most of what it lost since the summer, it has not (yet at least) reversed its downtrend.
My price target of $7.00 is unchanged. It equates to a valuation multiple of about 13.5 times projected 2024 GAAP EPS of $0.52 (down from $0.54 previously). That represents a potential return of 6.4% from the current quote of $6.58. I continue to rate the stock neutral.
This is a summary of my recent report on Mistras Group (MG). For a copy of the full report, please reach out to me using the contact information provided below.
December 12, 2023 (The full report was published on the same date.)
Stephen P. Percoco
Lark Research
839 Dewitt Street
Linden, New Jersey 07036
(908) 975-0250
admin@larkresearch.com
© 2015-2024 by Stephen P. Percoco, Lark Research. All rights reserved.
This blog post (as with all posts on this website) represents the opinion of Lark Research based upon its own independent research and supporting information obtained from various sources. Although Lark Research believes these sources to be reliable, it has not independently confirmed their accuracy. Consequently, this blog post may contain errors and omissions. Furthermore, this blog post is a summary of a recent report published on this subject and that report provides a more complete discussion and assessment of the risks and opportunities of any investment securities discussed herein. No representation or warranty is expressed or implied by the publication of this blog post. This blog post is for informational purposes only and shall not be construed as investment advice that meets the specific needs of any investor. Investors should, in consultation with their financial advisers, determine the suitability of the post’s recommendations, if any, to their own specific circumstances. Lark Research is not registered as an investment adviser with the Securities and Exchange Commission, pursuant to exemptions provided in the Investment Company Act of 1940. This blog post remains the property of Lark Research and may not be reproduced, copied or similarly disseminated, in whole or in part, without its prior written consent.