Just because someone thinks a company’s stock is worth going up doesn’t mean they will. Even if you are correct in your valuation of a company, you could experience great volatility between the when you bought the stock and when the stock realizes its potential. A good example is International Matthews Society (NASDAQ: MATW). As the broader market has shrunk, so too has that company’s share price. However, when you dig deeper into the company’s recent financial performance, you will see continued improvement from where it has been for the past few years. As long as this trend continues, stocks will look pretty cheap at current prices. Barring a change for the worse, all investors will need a little patience for this opportunity to pay off.
A dichotomy exists
In June 2021, I wrote my last article on Matthews International. In this article, I called the company an attractive prospect. I recognized that financial performance before and during the COVID-19 pandemic was less than ideal. The company certainly had to face difficulties both in terms of turnover and results. However, I also noticed that the financial situation was improving. On top of that, assuming the trend continues, stocks looked quite attractive from a price perspective. As a result, I have ultimately rated the business as a “Buy”, indicating that I believe there is potential for growth for the business in the future. Unfortunately, the market has since disagreed with me. While the S&P 500 fell 7.7%, shares of Matthews International lost 8.4%. It’s not a significant difference, but a drop is painful nonetheless.
Given the company’s stock price performance, you might think that the fundamentals of the business have deteriorated. But they didn’t. In fact, the company’s image is currently better than it has been for several years, although we are seeing some recent pressure on its results. Consider financial performance for 2021. During that year, revenues reached $1.67 billion. This represents an increase of 11.5% from the approximately $1.50 billion generated in 2020. It is also the highest revenue the company has recorded since at least 2015.
What’s really great about the increase from 2020 to 2021 is that it was general in nature. Revenues increased in all three operating segments of the business. For starters, the SGK Brand Solutions segment, which provides brand experience and packaging solutions to its customers, saw revenue grow from $693.1 million in 2020 to $726.9 million annually. last. Meanwhile, the industrial technologies segment, which provides a variety of marking and coding equipment and consumables, industrial automation solutions and warehouse automation systems, and more, saw its revenues from $149.2 million to $175.1 million. And finally, we have the memorial segment, which offers a full line of memorial products used largely in cemeteries, funeral homes and crematoria. Revenue here has gone from $656 million to $769 million.
The company’s bottom line also improved. Net income in 2021 was $2.9 million. This compares favorably to the loss of $87.2 million incurred in 2020. Operating cash flow deteriorated from $180.4 million to $162.8 million. But if we adjust for changes in working capital, it would have gone from $103.2 million to $154.3 million. Meanwhile, EBITDA managed to increase over the same period from $203.1 million to $227.8 million.
With regard to the 2022 financial year, the results were certainly less robust. Revenues held up quite well, amounting to $883.6 million in first semester. This represents a 9.9% increase from the $803.8 million reported in the same period a year earlier. This revenue growth was driven by the strength of the company’s three operating segments, as was the increase in sales between 2020 and 2021. On the other hand, we saw some weakness in profitability. In the first half of 2021, the company generated net income of $3.2 million. That turned into a loss of $21.7 million this year.
This pain came due to weakness in two of the company’s segments. SGK Brand Solutions saw its profitability fall from $40.2 million to $28.9 million, while Memorialization saw a drop from $95.7 million to $86.3 million. At least the industrial technologies segment performed well, with profits rising from $11.3 million to $21.6 million. Management says lower margins are due to a combination of factors, including higher material expenses associated with steel, wood and bronze ingots, as well as labor and transportation costs. . The company also saw production inefficiencies due to onsite and remote work transitions and adverse changes in sales mix with the SGK Brand Solutions segment.
Unfortunately, this pain has had an impact on the company’s other profitability measures. Cash flow from operations decreased from $92.2 million to $72.7 million. And EBITDA went from $115.7 million to $108.5 million. In terms of direction for the year, management didn’t provide much. The only thing they said is that EBITDA should be around $220 million. If we assume that the company’s other profitability metrics will move in step with EBITDA, investors should expect net income of around $2.8 million and cash flow from operations of around $157 million. $.2 million for fiscal year 2022. However, it should be noted that achieving these goals might not be straightforward. While the company had strong cash flow from operations of $99.9 million in the second quarter of 2022, a figure that eclipses the $56.9 million reported a year earlier, we only saw no further evidence of significant improvement in other profitability figures.
By giving management the benefit of the doubt, we can effectively evaluate the business. Using our 2021 results, we can calculate that the business is trading at a price/operating cash flow multiple of 5.9. This only increases slightly to 6.1 if the 2022 estimates are accurate. Meanwhile, the EV/EBITDA multiple is expected to be 7.1. However, that should rise to 7.4 if management’s own forecast for 2022 turns out to be correct. These multiples seem cheap on an absolute basis, but it would be useful to assess the company against similar players. Truth be told, perhaps the only true comparable is Hillenbrand (HELLO). I say this because other companies related to the death care space are significantly focused on this market and have little to no hardware operations outside of this space. But Matthews International and Hillenbrand are quite diversified in their operations. Currently, using 2021 results, Hillenbrand is trading at a price/operating cash flow multiple of 8.2 and it is trading at an EV/EBITDA multiple of 7.6.
From the data we have so far, it seems to me that Matthews International continues to do well in terms of revenue. On the other hand, we see some pressure on its results. In the short term, this could prove problematic. But in the long run, I suspect the company would do well. The shares are also cheap on an absolute basis while having a similar price to Hillenbrand. I don’t see this as a home run by any means, but I do think there is upside potential. For this reason, I would still call the company a “buy” today.