Met-Pro (MPR), which I recently valued in the $9.5 to $11 per share range, just announced its Q1 fiscal 2013 results. Additionally, the company held a conference call to cover these results in more detail. The main highlights from the earnings release and conference call, as well any impacts on my valuation, are listed below.
- The company continued to see a strong level of orders, revenue, and backlog. Q1 revenue was $25.2M (a 7.6% increase year-over-year) and backlog ended at $30.2M (almost a 50% increase year over year). While I would have liked to see them ship out of more of the Q4 ending backlog, the results still project well for this year.
- The bulk of the revenue increase came from the product recovery/pollution control technologies segment, which I believe is a good sign as this segment needs to grow in order for the company to be in the consistent double-digit revenue growth area. The other good news from the conference call was that for the fluid handling and the mefiag filtration segments the company sees the decline in revenue as a temporary phenomenon.
- The company had gross margins of 35.5% compared with 24.4% in the previous year. During the conference call the company indicated that in general the pricing environment is reasonably stable, which is a good sign. I had previously assumed the company would be at the level of 35% gross margins on the year, so this seems to be in line. As larger orders come in, such as in Q1 (that will be shipped in Q2 and Q3), it could put some pressure on margins because of more aggressive prices.
- Cash generation was very strong in the quarter with the company generating around $500K compared with an outflow of around $2.4M a year ago. The company's working capital items basically offset each other and they also had a much lower contribution to pension plans during the quarter. The company had a strong performance on receivables collections while that was offset by a large increase in inventory. I suspect that the inventory increase is a result of the strength in product recovery/pollution control technologies segment, as it typically will be expected to have a larger inventory investment.
- The company only had an operating income percentage of 6.9%, which is considerably lower than my expectations and where the company would historically be in a normalized revenue environment. The main driver was nearly $700K related to what the company called transition expenses for the new CFO. I felt the company could have done a better job to break down the real drivers of this $700K, rather than just give the general reasons (stock options, severance, employment fees, etc). Backing out this impact the OPEX is still a little high for my liking at around 25.8%, but operating income is near the 10% level I would target (due to the higher gross margins). Indications from the company are that it should still get back to a more normalized level of OPEX for the rest of the year (sub-25%).
- The company's cash balance (and investments) remains at historically high levels (about $33M) and I would prefer to see the company declare a special dividend rather than hold this cash and invest small portions in fixed-income securities. Additionally, the company has about $1M in short-term investments, which is almost equal to the amount it pays out in quarterly dividends. I assume the company is going to use the funds for some acquisition, which is still a concern for me given most companies inability to do that in an efficient and value-creating way.
- One area I don't think the company does a good job explaining is the part of the cost structure that it would consider to be more of an investment into new areas. That is to say, it hasn't done well showing how much of the OPEX is perhaps sales costs into new markets, business development type costs, etc. I believe that amount is probably a couple of percentage points as the company is trying to expand internationally, but it is very hard to tell and I believe the company's share price suffers for a lack of visibility.
In general, there was nothing in this latest earnings release to cause me to change my valuation of the company. I would still put it in the same range, but the large transition expenses and elevated OPEX would really imply the company must be able to grow sales in the 15%-plus range, in order to start making these investments pay off. The company does have strong cash flow generating abilities and if it can really make the international investments pay off, it could drive a significantly higher valuation. For now, I would continue to require a discount to the low end of my valuation range in order to be a buyer (perhaps in the sub $9 per share range).
Disclaimer: This article should not be taken as investment advice, and is for informational purposes only.
Disclosure: I am long MPR.