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No. of Recommendations: 13
Mistras Group as been around since 1978. It was founded by Greek born Sotirios Vahaviolos -- a Ph.D in electrical engineering. The company started life as Physical Acoustics and was renamed Mistras after the Greek town where he was raised. Mistras IPO’ed in 2009.

A short bio:

Sotirios J. Vahaviolos has been our Chairman, President and Chief Executive Officer since he founded Mistras in 1978 under the name Physical Acoustics Corporation. Prior to joining Mistras, Dr. Vahaviolos worked at AT&T Bell Laboratories. Dr. Vahaviolos received a B.S. in Electrical Engineering and graduated first in his engineering class from Fairleigh Dickinson University and received Masters degrees in Electrical Engineering and Philosophy and a Ph.D.(EE) from the Columbia University School of Engineering.

During Dr. Vahaviolos’ career in non-destructive testing, he has been elected Fellow of The Institute of Electrical and Electronics Engineers, a member of The American Society for Nondestructive Testing (ASNT) where he served as its President from 1992-1993 and its Chairman from 1993-1994, a member of Acoustic Emission Working Group (AEWG) and an honorary life member of the International Committee for Nondestructive Testing. Additionally, he was the recipient of ASNT’s Gold Medal in 2001 and AEWG’s Gold Medal in 2005. He was also one of the six founders of NDT Academia International in 2008 headquartered in Brescia, Italy.

The founder is still the CEO and he owns 42% of the company. Insiders as a group own 58%. There are only 26 million shares outstanding He makes $345,000 per year. He does have a lot of stock options sitting in his account amounting to $9.7 million. That’s nearly 2 million more shares.

The huge insider ownership can be a blessing or a curse. The CEO has said he would not sell the company at recent prices. However, they have no need to ask marginal shareholders for permission and MG could be sold off at any point without shareholder consent or vote.

OTOH, they do have a strong incentive to make the company work and continue to do quality work that keeps customers happy and renewing contracts.

Their specialty is non-destructive testing [NDT] of infrastructure. Inspections can include refineries, bridges, buildings, nuclear power plants, boilers, and oil field infrastructure.

Mistras is able to non-invasively probe infrastructure for defects with ultrasound, infrared, thermography and radar. Using these technologies Mistras can see cracks, corrosion and other defects that could bring the structure down, leak or fail. They evaluate new construction and existing infrastructure.

Most of the tests rely on variations of ultrasound. Mistras designs and manufactures a proprietary line of ultrasonic equipment and vibration sensing equipment. They have their own manufacturing facility in NJ.

The equipment and interpretation of data is more complex than the older methods of physical testing the structure’s materials and visual inspection through dismantling the equipment. That gives Mistras a moat of sorts although there is competition in NDT. They try to differentiate their service by providing one source for the entire cycle of inspection compliance. To that end of they offer inspections and also provide proprietary software packages that allow customers to continuously maintain plants and equipment and monitor for early signs of trouble and proactively correct early defects. Mistras has technologically advanced inspection capabilities using ultrasound, thermography and infrared and has software that digitally organizes, analyzes and compares inspection data and instructs clients on asset protection, maintenance and retirement methods.

They have operations in 15 countries and tend to establish a relationship business with clients for scheduled inspections. Customers include

• oil and gas (downstream, midstream, upstream and petrochem)
• fossil and nuclear power
• alternative and renewable energy
• public infrastructure
• chemicals
• aerospace and defense
• transportation
• primary metals and metalworking
• pharmaceutical/biotechnology
• food processing industries
• research and engineering institutions

Some little companies you may have heard that use MG:

• BP
• Chevron
• Exxon
• Bechtel
• Duke Energy
• Westinghouse
• Exelon
• Air Products
• Honeywell
• Kaiser
• Caltrans Dept of Transportation

Their largest market and client base is currently in oil & gas infrastructure and refineries:

2011 61% of revenue
2010 63% of revenue
2009 58% of revenue

BP is 18% of revenue in 2011.

There is room for organic growth. Out of 700 refineries worldwide MG has contracts with 49 and works with only 25 of 438 nuclear plants globally. With 81% of its revenue coming from the US, expansion internationally seems likely. Mistras plans to grow 2/3 organically and 1/3 through acquisitions It has acquired 25 businesses over the years.

MG has three financial segments:

• Services. This segment provides asset protection solutions primarily in North America with the largest concentration in the United States, consisting primarily of non-destructive testing and inspection services that are used to evaluate the structural integrity and reliability of critical energy, industrial and public infrastructure.

• Products and Systems. This segment designs, manufactures, sells, installs and services our asset protection products and systems, including equipment and instrumentation, predominantly in the United States.

• International. This segment offers services, products and systems similar to those of our Services and Products and Systems segments to global markets, principally in Europe, the Middle East, Africa, Asia and South America, but not to customers in China and South Korea, which are served by our Products and Systems segment.

Financial results for 2011


In 2011 revenues increased 24% with growth in all segments. Revenue in 2010 was up 30% For fiscal 2011 and fiscal 2010 organic growth rate was approximately 16% and 18% respectively. That means that the company is sticking to its predictions that the bulk of growth will be organic. For 2011, organic growth was 66% of total growth and in 2010 it was 60%.

They made five acquisitions in 2011 compared to three acquisitions in 2010 and five in 2009.

The largest dollar increase in business is from global oil and gas and includes several new and existing projects, an increase in “run and maintain” contracts and new work from acquisitions. Revenues from the oil and gas grew approximately 20% and provided approximately 61% and 63% of total revenues for fiscal 2011 and 2010 with the largest increase coming from the petrochemical segment of the oil and gas industry.

As a group, all markets other than oil and gas grew approximately 32% over the prior year.

The top ten customers represented were 44% revenue for fiscal 2011 compared to 45% in 2010. The largest customer, BP, accounted for approximately 18% of revenue in both 2011 and 2010. No other customer accounted for more than 8%

Even with the revenue increase in 2011, gross margin was flat The 20% increase in O&G is lower margin and 61% of revenue. The lower margins are due to long contract duration and heavier reliance on more labor intensive NDT services. The advanced NDT service has better margins. As long as they are heavily reliant on O&G I would not look for margin improvement as a way to boost earnings.

Gross was also affected by the sluggish recovery from the recession Work orders were down from shop work and industrial markets that have higher margins. In a more vigorous and sustained recovery, MG might improve margins. Meanwhile O&G is of outsized importance to them. Refineries are the largest area of the O&G market

Services revenue

The fastest growing segment is services. Services segment revenues had a CAGR of 35% for three years The increases were 24% [2011], 36%[2010] and 44% [2009].

The 2011 organic growth was 16% and growth from acquisitions was 8%. The increased sales activity was driven by base growth in manpower requirements, turn-around activities inside evergreen contracts and several new multi-year contracts. Growth was mainly due to oil and gas, chemical and power generation with the largest growth in dollars coming from the oil and gas industry--- both the downstream and midstream segments.

Product revenue

In fiscal 2011, 2010 and 2009, this segment revenue growth was approximately 38%, 9%, and 4%, respectively. The high growth in 2011 was largely due to an acquisition that increased revenue by 51%.

The largest customer is their International segment, that distributes primarily to European, and Asian and North African markets. Other larger markets representing approximately 55% of total segment revenues have been research and test laboratories, nuclear and fossil power, and industrial and aerospace companies.

The international segment revenues increased 19%, to $36.8 million in 2011

Revenues from oil and gas and chemicals markets are 47% of revenue in 2011. Most of this business is in major oil refineries in Europe and South America.

Other revenues are more widely distributed including infrastructure, industrial, manufacturing and other testing companies, research centers and universities.

MG does grow through acquisition. The company’s intention is to target 2/3 organic to 1/3 acquisition growth and so far that has worked. Organic growth remains impressive in the high-teens.

With acquisition goodwill has increased from $39 million in 2009 to $64 million in 2011

Summary of acquisitions since IPO

dollars in thousands

2011 2010 2009
Number of entities 5 3 5
Cash paid $26,195 $14,350 $10,464
Subordinated notes issued 10,387 5,399 7,343
Debt assumed 1,120 — 1,475
Contingent consideration 4,649 687 471
Purchase price $42,351 $20,436 $19,753

Intangibles/customer lists 15,664 8,239 3,982
Goodwill 19,435 5,067 10,830

These are small acquisitions. When I look at any company that is a serial acquirer with increasing goodwill, I always check the returns on invested income. The invested capital includes goodwill and intangibles in my calculations. I also look at debt/capital to see if they appear to be overleveraged

By the numbers acquisitions are adding to value and the company has not gone overboard with debt. They don’t have huge cash accounts but have some on the balance sheet.

2011 2010 2009
ROIC 12.2% 12.3% 11.3%
debt/capital 11.6% 9.3% 3.6X
Cash millions 10.88 16.04 5.67

WACC for 2011 is 10%. The spread is narrow but positive. That is partially due to low ratios of debt. I did not include operating lease debt which is relatively small. They are creating some value with a positive spread and I expect it can widen as the company continues to grow operating income and probably take on slightly higher debt levels to finance acquisitions. They have room to add more leverage.

Cash flow from operations is positive. Capex is covered but acquisitions have pushed free cash flow to negative. That has been financed with debt.

2011 2010 2009
CFFO 25.25 18.99 12.66
Capex 10.08 1.95 5.37
Acquisitions (26.20) (14.70) (10.46)
FCFE (11.02) 2.34 (3.17)
CFFO/net 1.54 1.82 2.32

Margins, growth consolidated and by segment

Revenue growth

2011 2010
Services 24.3% 36.0%
Products and Systems 38.3% 9.0%
International 19.0% 6.0%
Consolidated 24.4% 30.1%

For 2011, consolidated growth was 24% with 16% organic or 67% of the growth was organic. For 2010 consolidated growth was 30% with 18% organic and 60% of growth was organic.

Gross income growth

2011 2010
Services 25.7% 27.8%
Products and Systems 33.5% 17.0%
International 10.7% -7.4%
consolidated 24.4% 20.0%

Operating income growth

2011 2010
Services 40.9% 65.3%
Products and Systems 99.2% 54.6%
International 17.7% -26.5%


2011 2010 2009
Gross margins
Services 27.5% 27.2% 28.9%
Products and Systems 50.7% 52.5% 49.0%
International 35.1% 37.7% 43.2%

Operating margins
Services 11.3% 9.9% 8.2%
Products and Systems 19.6% 13.6% 9.6%
International 9.6% 9.7% 14.0%

The next quarter will be available in October.

This is a fast-growing small company in what appears to be a relevant business. There is a continuing need for inspection and maintenance of high cost complex assets. The one thing I currently do not have a good grasp of is the entire market and MG’s percentage share of the market. Many competitors are small segments of big corporations and will be hard to segregate from the parent—have not done the work yet. Others are small but have more restricted offerings according to MG

From the filing:


We operate in a highly competitive, but fragmented, market. Our primary competitors are divisions of large companies, and many of our other competitors are small companies, limited to a specific product or technology and focused on a niche market or geographic region. We believe that none of our competitors currently provides the full range of asset protection and NDT products, enterprise software and the traditional and advanced services solutions that we offer. Our competition with respect to NDT services include the Acuren division of Rockwood Service Corporation, SGS Group, the TCM division of Team, Inc. and APPLUS RTD, which is majority-owned by The Carlyle Group. Our competition with respect to our PCMS software includes UltraPIPE, a division of Siemens, Lloyd’s Register Capstone, Inc. and Meridium Systems. Our competition with respect to our ultrasonic products are GE Inspection Technologies and Olympus NDT.

In the traditional NDT market, we believe the principal competitive factors are project management, availability of qualified personnel, execution, price, reputation and quality. In the advanced NDT market, reputation, quality and size are more significant competitive factors than price. We believe that the NDT market has significant barriers to entry which would make it difficult for new competitors to enter the market. These barriers include: (1) having to acquire or develop advanced NDT services, products and systems technologies, which in our case occurred over many years of customer engagements and at significant internal research and development expense, (2) complex regulations and safety codes that require significant industry experience, (3) license requirements and evolved quality and safety programs, (4) costly and time-consuming certification processes, (5) capital requirements and (6) emphasis by large customers on size and critical mass, length of relationship and past service record.

It leaves me knowing only one part of what may be a large competitive market. By their accounts, it is highly fragmented and lacks a one-stop shop. They are attempting some consolidation through acquisition. From what I can ascertain from MG’s filings they are seeing rapid growth and are doing it with discretion and positive returns.

Looking at small businesses in fragmented markets is difficult. You have to decide if they have the staying power and the vision to grow into a major player. Amedisys, WOOF and Neogen are some I have familiarity with that use acquisition to further their dominance in a particular fragmented market. Neogen has been the best performer. It is a model that can work. Amedisys is failing because of heavy reliance and running afoul of Medicare; WOOF has recession related problems.

MG is well run and management has enough of a stake in the business to see to it that it stays well managed. The company’s growth is impressive and it did well even through the recession. In 2008 revenue growth was 25% and it was 37% in 2009. This leads to me believe that macroeconomics do not affect the company as negatively as it does their biggest customers in the O&G sector. It would suggest that the company performs critical functions that cannot be cut even if the economy is lagging.

I have mostly quit running DCFs because they are so easy to manipulate and the results are suspect. I went ahead and did a DCF for MG because I had almost no idea of what the high growth was worth. I don’t often get interested in high growth profitable companies because I don’t seem to have a talent for finding any.

I did not subtract the value of the options.

Revenue reaches $1.2 billion by year 10. Considering they have nearly quadrupled revenue in 5 years, I felt that was a reasonable assumption for 10years out given the nature of the business. It’s not a discretionary product and the need to keep infrastructure operational and safe can only continue to grow. Acquisitions will help growth if they continue and they have affirmed this is a vital part of the strategy. As such, I gave them 20% growth for 5 years tapering to 6.4% by year 9 and with 3% terminal growth.

The discount rate is 10%

The value per share is $26.14.

Calculating the value of the calls/options with a BS gives a value of the overhang of $1.60.

I like them. Not sure where I would get in. An article from Barron’s believes they are worth somewhere in the mid-$20’s


From May:

Mistras Passes the Test


The small Princeton company is turning a tidy profit testing the structural soundness of bridges, refineries and such. Its shares could keep climbing along with earnings.

Is the economy struggling? You wouldn't know that from Mistras Group, whose business—structural testing of oil refineries, bridges, boilers and the like—is growing like gangbusters. The small Princeton, N.J.-based outfit is expected to boost earnings by roughly 30% in each of the next two years by broadening its customer base, making more acquisitions and improving profit margins through the sale of higher-priced services.

The Bottom Line

Mistras shares, now around 16.60 [now around $18], could rally to the mid-20s in the next 12 to 18 months. The company dates to 1978 but went public in 2009.

The company aims to generate two-thirds of its growth organically and one-third through acquisitions in a fragmented industry. "Acquisitions give us trained and certified employees," says Vahaviolos. Of the 25 companies Mistras has acquired, 23 of the former CEOs still work for the company.

Mistras might make a tasty morsel for a larger testing concern, but Vahaviolos says he "would never sell at this price." Chances are he won't have to. Based on the company's earnings growth, decent balance sheet and strong prospects, he might, in time, get a whole lot more.
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