Mistras Group Soars on Unexpected Earnings, Sales Strength

The industrial testing specialist defied the pessimistic views of investors with its gains.

Dan Caplinger
Dan Caplinger
Oct 7, 2015 at 5:20PM

Image: Mistras Group.

When sentiment against an unpopular sector of the economy reaches extremes, there are opportunities for companies to break out of the rut and shine. That's exactly what happened with Mistras Group (NYSE:MG), whose industrial-equipment testing equipment had been an apparent casualty of the energy bust. Coming into Wednesday afternoon's fiscal first-quarter financial report, Mistras Group investors weren't expecting much from the company, but its results showed that its fundamental business has a lot going for it even when conditions aren't ideal for growth. Let's look more closely at Mistras Group and how it managed to give investors such a positive surprise to begin its new fiscal year.

Mistras Group crushes the skeptics
Mistras Group's results were unequivocally strong during the quarter. Revenue jumped 8% to $179.9 million, which was far better than the 2% decline that most investors had expected Mistras to post for the quarter. On the bottom line, things were even better for Mistras, with net income more than quadrupling from year-ago figures to $6.9 million, working out to $0.23 per share, more than double the $0.09 consensus forecast among investors.

Mistras continued its trend of making the most of its acquisition activity. In the services segment, revenue climbed 13%, with management attributing the gains to a combination of organic growth and newly purchased businesses. A rebound among some of its refinery customers helped Mistras as well, as the company had suffered from strikes in the energy industry earlier in the calendar year. The products and systems segment saw sales jump 32%, with gains in gross margins of nearly five percentage points helping to reverse a year-ago operating loss. International segment revenues fell by 8%, but all of that decline came from foreign currency impacts, and organic growth on a currency-neutral basis was up by double-digit percentages.

CEO Sotirios Vahaviolos was optimistic about the moves that Mistras has made to try to adapt to changing conditions in its target industries. "We took a number of decisive actions in our previous fiscal year that were made to improve our results despite oil and gas market conditions that remain challenging and unsettled," Vahaviolos said. "We are extremely pleased that we can already see positive impacts from these actions across our entire business globally."

Will Mistras Group keep up its positive momentum?
Mistras was pleased with its surprisingly good results, but it isn't taking for granted that this indicates a long-term permanent shift toward a recovery. Even though the company acknowledged that the fiscal first quarter went better than expected, it left unchanged its previous full year fiscal 2016 revenue guidance of $710 million to $725 million, citing uncertain market conditions and the difficulty it matching up to a strong fiscal second quarter last year. Nevertheless, Mistras did give investors a reason for optimism, noting that it now believes that earnings for the full year will come in toward the higher end of its previous guidance for $72 million to $78 million on an adjusted EBITDA basis.

Mistras also gave investors good news about its capital structure. The company said that it had made substantial progress in paying down debt over the past several quarters, and so now it's looking to divert some of its available cash flow toward returning capital to shareholders. Specifically, Mistras approved a stock repurchase plan that will allow the company to spend up to $50 million to buy back stock. Mistras said that "we believe that our stock price is trading well below its intrinsic value," further supporting value investors who have argued that traders have unfairly punished the share price in the past.

Mistras also gave guidance for fiscal 2016 that reflects ongoing difficult conditions. It expects sales to come in between $710 million and $725 million, which would be flat to up slightly from final 2015 figures. Slight increases from both organic growth and acquisitions should offset pressure from currency issues, and the company expects adjusted operating earnings of between $72 million and $78 million, which would work out to growth of between 1% and 9%.

Mistras investors were initially ecstatic about the news, sending the stock up as much as 23% within the first 15 minutes of after-hours trading following the announcement. With the stock having gotten hit hard from the impression that it was reliant on an energy recovery, the fact that Mistras has already made this much progress without an oil-price bounce suggests that many investors were far too pessimistic about its long-range prospects. That could bode well for shareholders in the near future as long as Mistras keeps executing well.