Mistras Group Predicts Tougher Times Ahead

By Markets Fool.com

The energy sector relies on being able to count on its equipment working well, and companies like Mistras Group (NYSE: MG) help ensure that its customers can rely on smooth functioning for their assets. Mistras Group's specialty is to monitor critical equipment to make sure it's working the way it should and to provide testing services to try to head off potential problems before they occur. Yet as valuable as those services are, tough times in the energy market have weighed on the company, and coming into Thursday's fiscal first-quarter financial report, Mistras investors were nervous about how well its numbers would hold up. What they found out is that Mistras started the year reasonably well but that tougher times could lie ahead. Let's look more closely at Mistras Group to see what it said about its past and its future.

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Image source: Mistras Group.

Mistras Group fights to work through tough times

Mistras Group's fiscal first-quarter results reflected the difficulties that the business has had as well as its success in making the most of a difficult situation. Revenue fell more than 6% to $168.4 million, which was slightly below what most investors had expected to see. Yet net income eased downward by just 4% to $6.6 million, and that produced earnings of $0.22 per share, topping the consensus forecast among those following the stock by $0.02 per share.

Taking a closer look at Mistras' numbers, the best news from the company was in how much its gross margin figures improved. The quarter marked the fifth straight period in which profit margin rose, and it's now nearing the 30% mark. Better sales mix, discipline in managing contracts, and smarter utilization of its technicians helped Mistras make the most of its revenue sources.

Mistras' two main segments had disparate performance. The services business saw adjusted operating income fall 10% on an 8% drop in revenue, and Mistras said that most of the decline was due to organic sources. The weak oil and gas market was a key driver of the results, but customer project timing and tough comparisons with the first quarter of fiscal 2016 also contributed to the lackluster results. By contrast, the international segment posted a 2% gain in sales, sending adjusted operating income higher by more than double from year-ago levels. Mistras attributed the unit's success to better sales mix in its German and U.K. businesses as well as fairly strong organic growth. The small products and systems segment didn't fare as well, encountering a nearly 30% drop in revenue that cost the unit almost a quarter of its profit.

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CEO Sotirios Vahaviolos tried to put the results in context. "I am disappointed with our first quarter revenue decline compared with last year," Vahaviolos said, "which is primarily reflective of the difficult oil and gas market where customers continue to be very cautious in their spending." The CEO said that he was pleased with margin improvements and the way that Mistras has managed to keep its bottom line healthy.

What's ahead for Mistras Group?

The problem, though, is that the industry environment hasn't lived up to Mistras Group's hopes. As Vahaviolos explained, "When we established our financial guidance for fiscal 2017, we expected that the market for inspection services would be flat to down and that our first quarter revenues would be approximately what we achieved. But based upon recent discussions with customers, we now expect that the fall season will continue to be weak."

As a result, Mistras cut its financial guidance. The company now expects a 2% to 4% decrease in revenue for the year, citing a range of $690 million to $705 million, which is about $30 million less than its previous range. On adjusted earnings, Mistras is now calling for $0.88 to $0.97 per share, down by $0.12 to $0.15 from the guidance it gave on bottom-line results earlier.

Even so, Mistras has potential for a recovery. The company called out its recent contract with French company Safran as possibly driving market share gains. In the long run, that would be beneficial to Mistras.

Mistras investors weren't happy with the report, sending the stock down 12% at midday on Friday following the Thursday night announcement. Until the energy market recovers more extensively, Mistras could keep suffering setbacks in its efforts to build up consistent growth, even though it has done a good job of being as efficient as possible.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Mistras Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.