Matrix: A Clean Energy, Infrastructure Play Priced Near Tangible Book Value

Summary

• Matrix is an overlooked clean energy name, repositioning itself to grow with hydrogen markets.
• The company's various operating units will be beneficiaries of a large U.S. government infrastructure spending plan.
• Selling close to tangible book value, with plenty of cash and little debt, the stock valuation could be listed in the "deep value" category.

Photo by audioundwerbung/iStock via Getty Images

Matrix Service (NASDAQ:MTRX) could be a winning investment idea into 2022 if Congress passes a major infrastructure bill. The company’s revenues have become increasingly concentrated in upgrading the electrical grid in America, constructing New Age hydrogen storage and transportation projects, plus building out liquid natural gas pipelines and storage. Crude oil-related projects have declined to 40% of revenue generation, peaking around 70% of sales a decade ago.

Another positive for investors, the company in January signed what is effectively a partnership agreement (memorandum of understanding) with Chart Industries (GTLS) to standardize the development of liquified hydrogen storage and delivery for the rapidly growing alternative-power vehicle market, pushing for cleaner energy sources. It is quite possible this is first step from Chart to test the waters of acquisition of Matrix. The company could easily use its richly-priced stock valued at nearly $6 billion to purchase Matrix at a small cap worth of just $350 million today. Depending on the growing success of their joint ventures in design and construction, Chart may want to fully integrate the manufacturing process to lead competitors in North America. According to Chart’s CEO Jill Evanko:

The combination of Chart equipment and process with the expertise Matrix brings in process integration, design, fabrication, construction and installation to create a unique and cost-effective solution for the North American hydrogen market, in particular for customers wanting a standardized solution.

Below are some slides taken from the company’s FY Q2 earnings release, highlighting the Matrix business makeup and focus today. Considering crude oil markets reached a major bottom last year (dragging down operating results in 2020), Matrix looks to have a unique Wall Street investment setup to benefit from a number of rising spending trends in the infrastructure and clean energy construction markets going into 2022.

Image Source: December Quarter Presentation

Selling Close to Liquid Net Assets

Matrix’s balance sheet is rock solid. At the end of December, the company held $305 million in cash and current assets like receivables and inventory against just $175 million in total liabilities with almost ZERO debt. Tangible book value including plant and equipment stood at $235 million. So, at $13 a share, investors are only paying $115 million above its net hard asset liquidation value! If business is turning for the better, a real “margin of safety” can be found in the balance sheet to support today’s low stock quote.

Cheap Valuation

Amazingly, despite a wonderful growth future (assuming President Biden’s clean energy plans are passed in a huge infrastructure deal soon), Wall Street continues to be focused on 2020’s weak performance. While every other company working in the electric vehicle or hydrogen fuel propulsion fields, plus the green energy initiatives in wind and solar, have been skyrocketing in price and valuation the last 6-12 months, Matrix has yet to get into gear.

Below is a graph of Matrix’s below average valuation on price to “trailing” tangible book value and sales in May compared to a decade of trading history. Translation: if operating trends are about to experience a turnaround and shoot higher in 2022, the stock quote has plenty of room to run.

In contrast, Chart Industries is selling for price to sales and tangible book value multiples roughly 10x the equivalent level of Matrix. In the end, growth rates for 2022-23 may be quite similar (if not better for Matrix), but one pick is starting from a point of media hype and overvaluation, and the other is misunderstood and locked in the cellar by analysts and investors!

Based on analyst forecasts for 2021-22, Matrix looks quite the bargain vs. Chart. Below are 1-year forward valuations on earnings and sales to review.

Even with the difficult reduction in sales caused by the collapse in crude oil last year, and slashed infrastructure budgets all over North America to conserve cash, Matrix has still been producing positive cash flow ($11 million cash flow, and $1 million in free cash flow the last four quarters) to survive until the next cyclical upswing in capital spending. Below is a 10-year chart of cash flow to sales and debt. Given a rebound in sales, cash flow should surge above 2020’s wipe-out.

Improving Technical Momentum

Over the last six months, the Matrix trading and momentum pattern have been incredibly strong. The exact opposite of 2019-20’s bearish trading situation, pictured below, a real recovery in the business could be about to materialize.

The Accumulation/Distribution Line, Negative Volume Index, and On Balance Volume measurements have all risen in robust concurrent fashion following the joint Matrix/Chart announcement in January. The fact price has only increased by 10% since early January means new buyers are still able to buy the company at a reasonable valuation, absent the retail investor euphoria seen in other clean energy names.

Final Thoughts

I mentioned Matrix as a turnaround candidate last April. Since then, stock performance has approximated the +50% gain outlined by the overall S&P 500 index. If Democrats and Republicans compromise on a $1 trillion rebuilding effort in America (using Biden’s $2+ trillion plan and the Republican counterproposal of $600 billion), with upgraded electrical systems and investments in clean energy infrastructure (like liquid natural gas and hydrogen facilities), the company’s prospects may be akin to a high-growth technology leader for years to come.

Then, factor in the decent rebound in crude oil demand and pricing, with energy corporations likely reinvesting larger profits into projects during 2022-23. I think it is entirely possible total revenues in the second half of calendar 2022 could be DOUBLE the first half of calendar 2021 level, using past economic upturns as a proxy, with a government infrastructure bill serving as a second powerful catalyst.

Depending on the success of its Chart Industries hydrogen buildout partnership, a large investment or takeover of the business by Chart could become reality in the next 12-18 months. For research/quant prospectors like myself, it has become very difficult to find any stock in the U.S. market that is mispriced and misunderstood, after the record near 100% advance in the S&P 500 over 13 months. Matrix could be just such a bargain for patient, long-term investors willing to wait a year or two for a sizable payday.

What could go wrong? I worry most about macroeconomic variables. A stock market crash generally (from record overvaluations), the lack of an infrastructure compromise in divisive Washington politics, spiking interest rates that inhibit capital spending projects, and/or any new black swan event that sends the U.S. economy into recession are the main “risk” issues to weigh.

Yahoo! Finance reports nine purchases by insiders and management over the last six months vs. no sales transactions. The buys are entirely stock awards, option grants and conversions of such, but individuals running the business do not appear to be in a hurry to dump shares.

I suggest a minor Matrix position in portfolio designs, primarily because of its small size and limited operating profitability estimated for 2021. A drop under $10 a share would also signal something is amiss in my bullish argument. On the other hand, a leap above $16 to 52-week highs would be an extremely bullish development.

Thanks for reading.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in MTRX over 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.

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