Stock Story -
Industrial construction and maintenance company Matrix Service (NASDAQ:MTRX) fell short of analysts’ expectations in Q2 CY2024, with revenue down 7.9% year on year to $189.5 million. On the other hand, the company’s full-year revenue guidance of $925 million at the midpoint came in 3.9% above analysts’ estimates. It made a GAAP loss of $0.16 per share, down from its loss of $0.01 per share in the same quarter last year.
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Matrix Service (MTRX) Q2 CY2024 Highlights:
- Revenue: $189.5 million vs analyst estimates of $202.8 million (6.6% miss)
- Adj. EBITDA: $0.2 million vs analyst estimates of ($2.6) million (beat)
- EPS: -$0.16 vs analyst estimates of -$0.21 (23.8% beat)
- Management’s revenue guidance for the upcoming financial year 2025 is $925 million at the midpoint, beating analyst estimates by 3.9% and implying 27% growth (vs -8.5% in FY2024)
- Gross Margin (GAAP): 6.6%, in line with the same quarter last year
- EBITDA Margin: 0.1%, in line with the same quarter last year
- Free Cash Flow Margin: 24.1%, up from 2.5% in the same quarter last year
- Market Capitalization: $255.9 million
Founded in Oklahoma, Matrix Service (NASDAQ:MTRX) provides engineering, fabrication, construction, and maintenance services primarily to the energy and industrial markets.
Construction and Maintenance ServicesConstruction and maintenance services companies not only boast technical know-how in specialized areas but also may hold special licenses and permits. Those who work in more regulated areas can enjoy more predictable revenue streams - for example, fire escapes need to be inspected every five years–. More recently, services to address energy efficiency and labor availability are also creating incremental demand. But like the broader industrials sector, construction and maintenance services companies are at the whim of economic cycles as external factors like interest rates can greatly impact the new construction that drives incremental demand for these companies’ offerings.
Sales GrowthA company’s long-term performance can give signals about its business quality. Even a bad business can shine for one or two quarters, but a top-tier one tends to grow for years. Matrix Service’s demand was weak over the last five years as its sales fell by 13.5% annually, a rough starting point for our analysis.
Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Matrix Service’s annualized revenue growth of 1.4% over the last two years is above its five-year trend, but we were still disappointed by the results.
This quarter, Matrix Service missed Wall Street’s estimates and reported a rather uninspiring 7.9% year-on-year revenue decline, generating $189.5 million of revenue. Looking ahead, Wall Street expects sales to grow 22.2% over the next 12 months, an acceleration from this quarter.
Operating MarginOperating margin is a key measure of profitability. Think of it as net income–the bottom line–excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Unprofitable industrials companies require extra attention because they could get caught swimming naked if the tide goes out. It’s hard to trust that Matrix Service can endure a full cycle as its high expenses have contributed to an average operating margin of negative 3.9% over the last five years. This result isn’t too surprising given its low gross margin as a starting point.
Looking at the trend in its profitability, Matrix Service’s annual operating margin decreased by 5.6 percentage points over the last five years. The company’s performance was poor no matter how you look at it. It shows operating expenses were rising and it couldn’t pass those costs onto its customers.
This quarter, Matrix Service generated an operating profit margin of negative 2.8%, down 1.7 percentage points year on year. Since Matrix Service’s operating margin decreased more than its gross margin, we can assume the company was recently less efficient because expenses such as sales, marketing, R&D, and administrative overhead increased.
EPSAnalyzing long-term revenue trends tells us about a company’s historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions.
Sadly for Matrix Service, its EPS declined more than its revenue over the last five years, dropping by 23.3% annually. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
Diving into the nuances of Matrix Service’s earnings can give us a better understanding of its performance. As we mentioned earlier, Matrix Service’s operating margin declined by 5.6 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.
Like with revenue, we also analyze EPS over a shorter period to see if we are missing a change in the business. For Matrix Service, its two-year annual EPS growth of 38.1% was higher than its five-year trend. This acceleration made it one of the faster-growing industrials companies in recent history.
In Q2, Matrix Service reported EPS at negative $0.16, down from negative $0.01 in the same quarter last year. Despite falling year on year, this print easily cleared analysts’ estimates. Over the next 12 months, Wall Street is optimistic. Analysts are projecting Matrix Service’s EPS of negative $0.92 in the last year to reach break even.
Key Takeaways from Matrix Service’s Q2 Results We were impressed by Matrix Service’s optimistic full-year revenue guidance, which blew past analysts’ expectations. We were also excited its adjusted EBITDA and EPS outperformed Wall Street’s estimates despite a revenue miss. Overall, we think this was a decent quarter with some key metrics above expectations. The stock traded up 6.7% to $9.75 immediately following the results.
