Environmental services provider Montrose (NYSE:MEG) fell short of the market’s revenue expectations in Q3 CY2024, but sales rose 6.4% year on year to $178.7 million. On the other hand, the company’s outlook for the full year was close to analysts’ estimates with revenue guided to $715 million at the midpoint. Its non-GAAP profit of $0.41 per share was 26.8% above analysts’ consensus estimates.
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Montrose (MEG) Q3 CY2024 Highlights:
- Revenue: $178.7 million vs analyst estimates of $185.5 million (3.7% miss)
- Adjusted EPS: $0.41 vs analyst estimates of $0.32 (26.8% beat)
- EBITDA: $28.31 million vs analyst estimates of $28.08 million (small beat)
- The company reconfirmed its revenue guidance for the full year of $715 million at the midpoint
- EBITDA guidance for the full year is $97.5 million at the midpoint, in line with analyst expectations
- Gross Margin (GAAP): 40.9%, up from 39.2% in the same quarter last year
- Operating Margin: -0.6%, up from -2% in the same quarter last year
- EBITDA Margin: 15.8%, up from 13.9% in the same quarter last year
- Free Cash Flow Margin: 5.7%, down from 7.7% in the same quarter last year
- Market Capitalization: $913.9 million
Montrose Chief Executive Officer and Director, Vijay Manthripragada, commented, "We are pleased to report another quarter of strong performance with record results driven by continued demand for our comprehensive suite of integrated solutions. Record quarterly revenues and Consolidated Adjusted EBITDA1, as well as the 190 basis points of margin improvement, evidence the alignment of our in-demand, higher-margin offerings with our strategic and financial goals. Our strong track record of organic growth, including ongoing cross-selling success, alongside the successful integration of recent acquisitions, continue to demonstrate the strategic advantages provided by our business model. "
Company Overview
Founded to protect a tree-lined two-lane road, Montrose (NYSE:MEG) provides air quality monitoring, environmental laboratory testing, compliance, and environmental consulting services.
Waste Management
Waste management companies can possess licenses permitting them to handle hazardous materials. Furthermore, many services are performed through contracts and statutorily mandated, non-discretionary, or recurring, leading to more predictable revenue streams. However, regulation can be a headwind, rendering existing services obsolete or forcing companies to invest precious capital to comply with new, more environmentally-friendly rules. Lastly, waste management companies are at the whim of economic cycles. Interest rates, for example, can greatly impact industrial production or commercial projects that create waste and byproducts.
Sales Growth
A company’s long-term performance can indicate its business quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Thankfully, Montrose’s 25.4% annualized revenue growth over the last five years was incredible. This is encouraging because it shows Montrose’s offerings resonate with customers, a helpful starting point.
We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Montrose’s annualized revenue growth of 10.8% over the last two years is below its five-year trend, but we still think the results were good and suggest demand was strong. 
This quarter, Montrose’s revenue grew 6.4% year on year to $178.7 million, missing Wall Street’s estimates.
Looking ahead, sell-side analysts expect revenue to grow 12.4% over the next 12 months, an improvement versus the last two years. This projection is noteworthy and indicates the market thinks its newer products and services will catalyze higher growth rates.
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Operating Margin
Although Montrose broke even this quarter from an operational perspective, it’s generally struggled over a longer time period. Its expensive cost structure has contributed to an average operating margin of negative 4.1% over the last five years. Unprofitable industrials companies require extra attention because they could get caught swimming naked when the tide goes out. It’s hard to trust that the business can endure a full cycle.
On the plus side, Montrose’s annual operating margin rose by 9 percentage points over the last five years, as its sales growth gave it operating leverage. Still, it will take much more for the company to reach long-term profitability.
In Q3, Montrose generated a negative 0.6% operating margin. The company's lack of profits raise a flag.
Earnings Per Share
We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth was profitable.
Montrose’s full-year EPS flipped from negative to positive over the last five years. This is a good sign and shows it’s at an inflection point.
Like with revenue, we analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business.
Montrose’s EPS grew at an astounding 68.7% compounded annual growth rate over the last two years, higher than its 10.8% annualized revenue growth. This tells us the company became more profitable as it expanded.
We can take a deeper look into Montrose’s earnings quality to better understand the drivers of its performance. Montrose’s operating margin has expanded by 4.2 percentage points over the last two years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.
In Q3, Montrose reported EPS at $0.41, up from $0.20 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Montrose’s full-year EPS of $0.79 to grow by 21.5%.
Key Takeaways from Montrose’s Q3 Results
We were impressed by how significantly Montrose blew past analysts’ EPS expectations this quarter. We were also glad its full-year EBITDA guidance exceeded Wall Street’s estimates. On the other hand, its revenue missed. Zooming out, we think this was a decent quarter featuring some areas of strength but also some blemishes. The stock remained flat at $24.39 immediately after reporting.
Should you buy the stock or not? When making that decision, it’s important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it’s free.
