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Matrix Service Company (NASDAQ:MTRX) is an industrial service contractor providing engineering, fabrication, construction and maintenance services in four segments: Electrical Infrastructure, Oil, Gas and Chemical, Industrial, and Storage Solutions. Each segment includes capital projects as well as maintenance.

By definition a matrix is a grid, model or pattern. Matrix Service is breaking patterns - sometimes in good ways and sometimes in ways that warrant a closer look.

From the positive, the forward P/E is 11.55, an attractive fraction of the industry average 32.40. Debt is low at $3 million with a debt-to-equity ratio of 1.55, just a little off the industry average 106.85.

Revenue growth at Matrix is an upwardly trending pattern. It depicts a steady year-over-year increase after a sharp decline in 2009. The past years show 2010 revenues at $551 million, 2011 revenues at $627 million, and 2012 revenues at $739 million for double-digit percentage growth of 13.8% and 17.9%, respectively. Revenue guidance for fiscal-year 2013 is a range of $800 million to $850 million. At the high end of that forecast, double-digit growth continues. And, comfortingly, for the first quarter of 2013, Matrix delivered revenue of $209,608,000, an eye-catching 23.8% year-over-year quarterly increase.

Another area in which Matrix sees intriguing growth is its backlog of signed contracts. The backlog at the end of the 2013 first quarter is $534.6 million, up from $497 million at year-end 2012, $405 million at year-end 2011 and $353 million at year-end 2010. The 7.6% quarterly increase is a healthy step after annual increases of 22.7% and 14.7% respectively.

But revenue is worth another look, a closer look. The lower third of the 2013 projection range would not continue the trend of double-digit growth. In fact, even at the top end of $850 million, the year-over-year growth at 15% doesn't reach 2012's 17.9%. In the investor presentation from November, 2012, Matrix unveiled a five-year strategy of targeting average annual revenue growth of 12%-15%. However, Matrix' own 2013 projections don't wholly align with that strategy. The lower end of the range (12%) would require Matrix to come in past the midpoint of its revenue projection of $800 million to $850 million at $828 million.

Earnings per share growth does not at all follow the Matrix revenue growth trend. It has averaged only 8% for the past five years. Diluted EPS for 2010 was $0.18, 2011 was $0.71, and 2012 was $0.65. The 2013 annual projection is $0.83 to $0.98. Still, the 2013 high-end estimate is more than 15% less than the 2009 peak of $1.16. A maturing and leveling appears to be setting in as five-year EPS growth estimates are currently only 10% annually. Average industry estimates are over 14%.

If cash is king, Matrix Service's pattern is puzzling. Cash for the 2013 first quarter ended at $17.2 million. This amount is over 50% off the year-end 2012 balance of $39.7 million. And that amount is over 40% less than year-end 2011 balance of $67.5 million.

Just as dramatically as the debt-to-equity ratio is promising, the pattern-breaker impacting cash is questionable. That pattern-breaker is the accounts receivable account. The change in the most recent quarter is far more than a blip. From the year-end 2011 balance of $103,483,000 to the year-end 2012 balance of $108,034,000, the A/R account increased just $4,551,000, a mere 4.4%. But the increase to $156,844,000 on September 30th, 2012 for the 2013 first quarter is a drastic 45% increase over year-end 2012. From another angle, the quarterly increase is over 10 times the previous annual increase. In fact, it has taken eight years for the A/R balance to change by the amount it changed in the 2013 first quarter. Matrix addresses the difference in its quarterly reporting:

"Accounts receivable increased by $49.5 million. The accounts receivable increase is due to a higher level of business and the timing of billings particularly in the Storage Solutions and Electrical Infrastructure segments. We view this increase as a short-term fluctuation. The receivable aging categories have not deteriorated and we do not anticipate any unusual collection difficulties."

The report also states that "progress billings in accounts receivable include retentions to be collected within one year of $21.3 million." The amount as of year-end 2012 was $22.3 million. Therefore, this amount is not a new consideration. Rather, the $49.5 million is indeed additional collections yet to occur.

While Matrix Service looks like an interesting investment opportunity at first glance, there are enough broken patterns to warrant continued monitoring. If new patterns emerge in positive directions, it would be easier to speculate that with double-digit revenue growth the next five years, the share price could return to the 2008 range of $20 to $25 per share rather than the $10 to $15 range since 2009. Specifically, monitor the A/R trend to see if a pattern is developing regarding collection woes. Monitor whether the debt ratio stays low. Trouble collecting the A/R balance could force Matrix to access its revolving credit line. This is especially pertinent as it stated in November it is looking for 40% of its growth to come through acquisitions in the next five years. With assets tied up in A/R rather than as a healthy cash-on-hand balance, acquisitions will be more difficult to accomplish. It would be easy to disguise increasing A/R balances as borrowing for acquisitions.

However, if cash starts to increase, A/R starts to decrease dramatically, debt stays relatively the same and Matrix continues to produce double-digit revenue growth, it will again be time to reassess its share price. But, for now, it's a puzzler and easier to be off the matrix than in the middle of it.

Source: Matrix Service Company: A Pattern Breaker