Mistras Group reported 24Q2 EPS of $0.20 vs. 23Q2’s $0.01 and my estimate of $0.11. Revenues of $189.8 million were up 7.8%, with all industry segments posting gains, including double-digit gains in segments that had been experiencing steady declines. Gross profit rose 12.9% to $56.1 million, with gross margin rising 140 bp to 29.6%. SG&A costs declined $0.5 million to $41.0 million. Reorganization costs were $0.5 million, down from $1.2 million. Excluding those and other exceptional items, Mistras’s non-GAAP EPS was $0.21, compared with $0.05 a year ago and my estimate of $0.13. Adjusted EBITDA was $22.1 million, up 45% over 23Q2 and above my estimate of $16.9 million.
Despite the improvement in profitability, the company’s free cash flow burn (according to its own definition of free cash flow) was $1.6 million, compared with last year’s positive free cash flow of $8.0 million. I had projected positive free cash flow of $3.2 million. Despite the shortfall, the company has reiterated its full year free cash flow guidance of $34-$38 million. That implies positive free cash flow of $41-$45 million in 24H2, compared with 23H2’s free cash flow of negative $4.6 million.
Mistras has reiterated the other aspects of its full year guidance: $725-$750 million in revenues and $84-$89 million in adjusted EBITDA. The guidance implies revenue growth of 2.4% in the back half of the year, down from 12.4% in the first half, and a 24% increase in adjusted EBITDA, with EBITDA margins rising 240 bp to 13.7%. This is a remarkable turnaround in revenue growth and earnings in a very short period of time; but it has not been confirmed to date by a commensurate improvement in free cash flow.
My 2024 projections are mostly consistent with management’s guidance. My 2025 projections continue the trend. Along with the 24Q2 earnings beat, my forecast anticipates 2024 GAAP EPS of $0.79, up from $0.69 previously, and non-GAAP EPS of $0.86, up from $0.79. For 2025, I project GAAP EPS of $0.86, up $0.02, and non-GAAP EPS of $0.91, up $0.01 from my previous forecast. If the company does achieve its 2024 free cash flow objective and delivers similar results next year, my projections show that it will end 2025 with a significant amount of cash on the books. Since my last report (7/12), MG’s stock has risen 30.1%, significantly outperforming the S&P SmallCap 600’s 1.5% gain. Based upon 24Q2 results and the company’s reaffirmed guidance, I am raising my price target from $10.00 to $12.60. That equates to a valuation multiple of 14.6, – (equal to the stock’s current forward multiple on 2024 estimated GAAP earnings) – times projected 2025 GAAP EPS of $0.86. The price target represents a potential return of 9.6% from today’s closing price of $11.50. Accordingly, I am reducing my performance rating from “2” (Outperform) to “3” (Neutral).
This is a summary of my recent update report on Mistras Group (MG). To obtain a copy of the report, please reach out to me using the contact information provided below:
August 20, 2024 (Report published on August 16, 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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