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Matthews International: Poised To Improve Even Further As Industrial Momentum Returns


  • Casket volumes in the memorialization segment have been very strong, resulting in strong operating leverage.
  • As pandemic restrictions ease, topline dynamics of the Brands and Industrial technologies division could pick up.
  • Management has managed to tone down leverage impressively even as the operating cash flow momentum remains strong.
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In Q3-20, I had written in detail about Matthews International Corporation (NASDAQ:MATW) - a diversified company with multiple drivers. You can glean some insight into my initial bullish stance on the stock here. While some parts of its business still continue to be hampered by the pandemic-related headwinds, generally, the company has coped well, showcasing strength in some core areas. This has been reflected in the price of the stock which is up ~67% since the publication of my previous article. In this article, I will explore some of MATW's dominant themes and shed some insight into the company's progress over the last few months.

Memorialization division performance key to improvement in Group EBITDA

During cyclical downswings, one often hears about the merits and qualities of "counter-cyclical" businesses, and invariably these stocks tend to get a lot of mileage then. MATW has a division that wouldn't normally be termed as "counter-cyclical," but it has benefited immensely from the current health pandemic on account of increased COVID-19 related deaths. Under this division, produces and distributes caskets and a whole host of memorialization products used in cemeteries, funeral homes, and crematories. This is a major contributor to the overall business with a 41% share of group revenue and the EBITDA margins of this division are group-leading as well (24% in Q1-21).

In the recently concluded December quarter (Q1-21), the memorialization segment sales saw revenue grow by ~19% driven mainly by increased sales of caskets due to pandemic-related deaths. In addition to this solid volume, the company has been attempting to drive through various productivity initiatives. The combination of these two factors resulted in significant operating leverage with the adjusted EBITDA growing by an impressive 46% annual growth, and adjusted EBITDA margins for this division coming in at an impressive 24%, a gain of 450bps YoY. Due to the strong weight of this division

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This article was written by

Michael A. Gayed, CFA profile picture
5x Dow & Founders Award Winner. Risk-On/Off $RORO, Junk-On/Off $JOJO, & $ATACX Portfolio Manager. Anticipate Crashes, Corrections, & Bear Markets With The Lead-Lag Report. Sign Up For 2 Weeks Free.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This writing is for informational purposes only and Lead-Lag Publishing, LLC undertakes no obligation to update this article even if the opinions expressed change. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services in any jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Lead-Lag Publishing, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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Comments (8)

SmallCapKing profile picture
Great article @Michael A. Gayed, CFA. I'm a long-time professional small-cap stock fund manager now doing this for myself, so usually I find holes in articles written here or sloppy work. This is awesome and, as a fellow holder of $MATW, I couldn't have said it better myself!

If you won't find it insulting, I'll add just a few points:

1) The Memorialization business is also benefiting from cremation equipment, which is a long-term trend and has a monstrous backlog of over a year! That business is also gives $MATW nascent opportunities in incineration equipment, which is starting to rebound but should be bigger in FY22. I think the combination of these with the strong pent-up demand of memorial markers should be enough to offset any expected decline of caskets (which it is certainly prudent to expect).

2) Leveraging cremation into incineration is a great segue into how they've leveraged their core cylinder business into energy storage. Of course, I want to hype this business so it gets the sexy "EV play" moniker, but the reality is that I've never heard them as excited about the prospects for this business as they were last Q. Of all their business, this definitely seemed to be the one where they seemed to have increased their optimism the most. Each production order they receive is $25-30M in revenue (2% of total, so not much individually), but they are seeing a huge jump in interest and backlog as a leading player in a very large market.

3) May I suggest that you underestimated the "phew!" aspect of SGK's sales to the European tobacco business? Let's be straight. That has sucked and been a big drag on $MATW. But as you rightly point out, the new regulations in Europe could save us... even if by not letting this business degrade further. Expect improvement to start Q3.

4) Reiterating what you pointed out, management is ridiculously bullish on upcoming Warehouse sales based on firm backlog and orders. Once the factories are open and operating normally, release the hounds!5) Overall, while $MATW certainly had some offsets to the destruction COVID left on much of their business, the rebound leverage is going to be fantastic - and seems baked in already through firm backlog and pent-up demand.

On sales growth of just 5% and 1.6% this year and next, and a rebound in operating margins to 4% (less than half where they were in FY17 and FY18), I have $MATW putting up EPS of $3.65 and $3.96. You say they have a long-run average multiple of 12.6x. I don't know where you got this, but I'm seeing 17x since IPO (16x if you use only the last 6 years, which were tough on EPS so should be low if they can grow again). Using those multiples, you can see where I get my price target of $60 - another 50% gain from here. I'm not the sell-side - I don't manipulate #'s to get "modest upside" before raising them again... and again... and again when company's hit them. I'm also not a lunatic who tries to "will" good numbers to match his expectation. I think my logic is sound and I hope others are on board with me as this rides to $60.

Follow me on Twitter at @SmallCapKing2 (don't forget the '2'). I share tons of ideas and thoughts there daily.
WallStPirate profile picture
Sorry I missed this in your article.

The management also highlighted the attractive prospects of their engineered products for the energy storage business which they expect to flourish in the coming year. Do note that this energy storage endeavor is something of a recent phenomenon for them, having received their first significant order only during the September 2019 quarter. This general low base means you could potentially see high growth rates in this vertical, more so at a time when the prospects of energy in 2021 look particularly bright.
Can someone point out to me where on their website it describes their lithium battery tech? Can't find anything about it. TIA
WallStPirate profile picture
@hardup It isn't on their website, it is hidden in their SGK Brands division. They use their roller tech to process the lithium for EV batteries. They already have 1 big contract someone thinks its Tesla and they claim to be talking to 12 others .

If you want to another source to learn more then the SmallCap King is the guy to go to, here is his twitter. He is smart and responsive.

SmallCapKing profile picture
@WallStPirate Thanks for the plug. ;) This was a great article, don't you think?
WallStPirate profile picture
@SmallCapKing Yes it was very good and you filled in some missing pieces I didn't know about. Thanks
WallStPirate profile picture
Good article, but you left out the lithium / ev play they have become.

They have a process for processing lithium and creating batteries. This could be a big tam for them.

They spoke two weeks ago and mentioned they are working with 12 battery co's.

This is from their last cc:
Thank you, David. Well, I will go one by one. With regard to production, as you might expect, we continue to work down the path of increasing our capacity to produce lithium sheet as quickly as possible for the clients that we're serving. Demand continues to grow. We're making progress. We feel comfortable that we can achieve our targets. That will be demonstrated over the course of the year. We're not going to speak about how much that is, how fast that is. But suffice it to say that if you wonder why we're in this business -- well, how we got into this business, lithium is expected to be printed -- to be produced just like printed paper as fast as you can. So that's our speed targets. We'll continue to work towards that. And once we get there, the whole cost of the lithium-ion battery will come down as well as capacity in the space. Remind me, again, what the second question was?

Pillpoppinpuppy profile picture
I'm surprised you would write about this company and not mention its electric vehicle battery systems and relationship with Tesla.
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