Source: Mistras Group.
Throughout the stock market, the strong U.S. dollar and poor economic conditions internationally have held back many companies that do business around the world. Coming into Wednesday afternoon's fiscal third-quarter financial report, industrial-equipment testing specialist Mistras Group (MG 5.87%) faced some concerns about the impact of its international business on its overall results, and as it turned out, those concerns were justified, as Mistras fell short of the overall growth that most investors had wanted to see from the company. With a sluggish start to the 2015 calendar year, Mistras investors want to know whether this is a one-time aberration or the beginning of a negative trend. Let's look at Mistras Group's latest results with an eye toward determining whether weakness will continue further into the year.
What held Mistras Group back this quarter
Mistras Group failed to carry the positive momentum it had produced last quarter into its most recent results, as both sales and net income didn't live up to the hopes of the company's shareholders. Revenue climbed 7.5% to $163.1 million, but that was well below the 11% growth that investors had expected to see. Similarly, calls for earnings of a dime per share proved dramatically out of reach, as Mistras announced adjusted earnings of just $0.01 per share.
Mistras CEO Sotirios Vahaviolos. Source: Mistras Group.
Keying in on the details of Mistras Group's quarter, most of the company's growth came from acquisitions, with organic growth producing just half a percentage point of upward sales pressure. The company's services segment grew sales by 12% in the fiscal third quarter, with buyout-based growth making up for a slight decline in organic revenue. Products and systems revenue also was a bright spot, with 12% organic growth helping to bring up the company's overall sales. Yet the international segment showed the difficulty that Mistras has had overseas, with revenue plunging 12% during the quarter as a 10% hit from adverse currency movements worsened a 4% drop in currency-neutral organic sales.
Mistras Group also had trouble keeping its margins at healthy levels. Gross margins fell more than two percentage points from year-ago levels, and that lead to a 1% drop in gross profit despite the rise in overall revenue levels.
Will Mistras Group disappoint its investors?
CEO Sotirios Vahaviolos explained the break in Mistras Group's streak of strong revenue growth, noting that the drop in oil and in particular an ongoing refinery strike crushed its services segment, hitting the company in what is traditionally its weakest quarter from a seasonal standpoint. Vahaviolos remains optimistic that the company will bounce back from the difficulties its customers are facing to find new ways to provide products and services that will help Mistras grow.
Image: Mistras Group.
Nevertheless, from an immediate standpoint, the poor quarter caused Mistras to prepare investors for weakness in its full fiscal year results. The company kept its sales guidance range unchanged at $720 million to $740 million, but it expects results to end up at the low end of that range. Operating earnings will likely fall short of its previous range of $78 million to $84 million, reversing what it had hoped would be guidance-beating performance just a few months ago.
Investors weren't pleased with the results, with the stock falling 3% in the first hour of after-hours trading following the announcement. Unfortunately, the current status of the energy industry is no clearer than it was a few months ago, and even though oil prices appear as though they might have hit bottom, we have yet to see what impact the price declines will have on spending decisions among many of Mistras Group's customers. Until investors have better visibility about what the future will bring, it'll be hard for Mistras Group to convince shareholders that the worst of the sales growth slowdown is over.
