Mistras Group reported 24Q1 EPS of $0.03 vs. 23Q1’s loss of $0.17 and my estimate of $0.00. Revenues of $184.4 million were up 9.8%, due mostly to strong maintenance turnaround activity in the Oil & Gas sector. Gross profit rose 10.9% to $51.1 million, with gross margin rising 30 bp to 27.7%. SG&A costs declined $1.6 million to $41.2 million, but less than the $3 million or so anticipated benefit from Project Phoenix. Reorganization costs were $1.6 million, down from $2.1 million. Excluding those and other exceptional items, Mistras’s non-GAAP EPS was $0.07, compared with ($0.12) a year ago and my estimate of $0.01. Adjusted EBITDA was $16.2 million, up 55% over 23Q1, above my estimate of $13.6 million.
Despite the improvement in profitability, the company’s free cash flow burn was $5.3 million, worse than last year’s $0.3 million burn. I had projected that Mistras would report positive free cash flow. Despite the shortfall, the company has reiterated its full year free cash flow guidance of $34-$38 million.
Project Phoenix, Mistras’s restructuring program, is substantially complete, but the company will continue to pursue opportunities to growth revenues profitably and reduce costs. It has hired a Chief Transformation Officer, Hani Hammad, who was the engagement partner at Alix Partners, the firm that guided Mistras through Project Phoenix. Restructuring costs will therefore continue, but at a slower pace.
Mistras has reiterated the other aspects of its full year guidance: $725-$750 million in revenues and $84-$89 million in adjusted EBITDA. The revenue guidance assumes that the high level of maintenance turnarounds that benefited 24Q1 will continue in 24Q2 and then level off in 24H2. The adjusted EBITDA guidance assumes a full year SG&A expense ratio of 21%, nearly 800 bp better than 2023.
My 2024 projections are consistent with that guidance and 2025 projections continue the trend. As a result, my forecast anticipates 2024 GAAP EPS of $0.69 and non-GAAP EPS of $0.79. For 2025, I project GAAP EPS of $0.84 and non-GAAP EPS of $0.90.
While the 24Q1 profit improvement is impressive, the lack of follow through on free cash flow and the company’s long history of failing to achieve its guidance makes the stock highly speculative. Yet, the market has been giving MG the benefit of the doubt, as the stock is up 22% YTD, significantly ahead of the S&P SmallCap 600’s 3% gain. The stock has been in a downtrend since peaking near $10 in April. Its current 3-day surge, along with other small caps, does not seem likely to be sustained in the short term.
Based upon the company’s guidance, I have raised my price target from $7.00 – my last report was issued on Dec. 11 – to $10.00. That equates to a valuation multiple of about 12 times projected 2025 GAAP EPS of $0.84 and represents a potential return of 13% from the current quote of $8.82. I am also raising my performance rating from “3” (Neutral) to “2” (Outperform).
Mistras expects to hire a permanent CEO by the end of 24Q3. Mr. Hammad appears to be a very good candidate. The company’s recent focus on streamlining its operations could enhance its attractiveness as an acquisition candidate. In that regard, Baker Hughes would be a likely suitor as Mistras would fit quite well with its Bently Nevada business.
This is a summary of my recent update 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.
July 13, 2024 (Report published on July 12, 2024.)
Stephen P. Percoco
Lark Research
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© 2015-2024 by Stephen P. Percoco, Lark Research. All rights reserved.
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