What happened

A fall in COVID-19 testing ate into results from environmental services company Montrose Environmental Group (MEG -1.74%), causing the company to miss expectations. Investors were apparently caught off guard, sending shares of Montrose down about 25% in midday trading Wednesday.

So what

Montrose provides environmental testing, lab services, remediation, and consulting to a range of industries. The company lost $0.50 per share on revenue of $139.5 million in the last three months of 2022, worse than the $0.23 loss per share on $141 million in revenue that analysts had expected.

The culprit was Montrose's CTEH environmental health business, and specifically COVID-related revenue, which was down by about $125 million for the year compared to 2021. Strip out the COVID business and overall Montrose revenue grew by 26%, with water treatment and greenhouse-gas measurement and mitigation leading the way.

CEO Vijay Manthripragada said in a statement:

As we have highlighted since our IPO, the emergency response nature of our CTEH business remains difficult to predict, as was the case in Q4. We expect to mitigate the inherent variability in this business through our investment in the organic growth of their non-response services and acquisitions. We continue to believe in the incredible value and strong synergies between core Montrose and CTEH response services.

Now what

The sell-off could have been worse. Montrose shares were down by as much as 40% early in the trading day before recovering some of what was lost.

In hindsight, the COVID-related surge couldn't last forever. But the company's overall business appears solid. Montrose forecast revenue of between $550 million and $600 million in 2023, compared to $544.4 million in 2022. Analysts are expecting sales of $586.5 million in the current year.

Montrose shares are arguably not a bargain, trading at about 1.9 times sales following Wednesday's fall. But they are off significantly from the 2.8 times sales that the stock commanded just a few weeks ago.

For investors able to handle some volatility, it might be a good time to add Montrose to the watch list.