Mistras Group (MG) 23Q3 Update

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

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