Matthews International Corporation Is A High-Yield Value For Small-Cap Investors

Matthews International Corporation

I would have called Matthews International Corporation (NASDAQ:MATW) a very unique business if not for the fact I just reviewed Hillenbrand (NYSE:HI) a week or two ago. Matthews International Corporation is a diversified industrial services company with a healthy exposure to end-of-life and mortuary needs; just like Hillenbrand. What makes Matthews International Corporation interesting to me is the fact business is strong, the stock offers a deep value compared to the broader S&P 500, and it pays a nice dividend. Just like Hillenbrand.

Joseph C. Bartolacci, President and Chief Executive Officer, said “We had a strong finish to fiscal 2020 and we believe the Company performed very well on a consolidated basis in this difficult environment … for the fiscal year ended September 30, 2020, we generated record operating cash flow for the Company, despite the challenges of the pandemic, which allowed us to repay over $100 million of debt …”

Matthews International Beats Top And Bottom Line Consensus

Matthews International Corporation soundly beat the top and bottom line consensus but there’s a catch. This company only has a single analyst rating as recent as this year and that is from way back in April. Since then the company has produced a solid rebound led by its Memorialization segment. On the top line, revenue came in at $399.1 million or up 1.7% from last year, 11.01% from the prior quarter, and nearly 800 basis points above consensus.

The Memorialization segment saw its revenue rise by 9.0% on demand for caskets, memorial products, and cremation supplies. That strength was offset by a 3.5% decline in SGK Brands (merchandising and advertising) and a 4.4% decline in Industrial Technology (automation). The merchandising segment may continue to see some softness in revenue but the automation segment should not. Social distancing and rising wages are going to drive this segment over the coming years.

Moving down, there is some mixed news concerning margins but the net result is good. The company’s gross margin shrank by 218 basis points but other metrics did not. The operating margin made a stunning comeback rising more than 21,000 basis points to regain a positive handle. Operating margins came in at 5.0% to drive a 100 basis point increase in EBITDA margin. Cash from operations increased by 38% resulting in $0.24 of GAAP earnings and $1.11 in adjusted EPS. The GAAP earnings beat by a nickel while adjusted EPS by a quarter.

Matthews International Pays A

Now, regarding the balance sheet, this company carries some debt but only a modest amount. The cash position could be better but there is ample free cash flow and debt is coming down. Over the course of the last quarter the company paid down another $26 million of outstanding debt bringing the fiscal 2020 total to just over $100 million or about 10% of the total.

Matthews International Corporation’s dividend is very attractive. The stock is yielding about 3.1% with shares trading near $28 and there is a high-probability the distribution will be increased next year. The company just upped the payment with the last declaration making 22 years of regular annual increases. The payout ratio at today’s rate is only 30% of earnings so there is room for further increases. The last increase is only 2.5%, not a lot, but longer-term CAGR is closer to 12%.

The Technical Outlook: Matthews International Is In Reversal

Shares of Matthews International have yet to recover their pre-COVID levels but I think it is only a matter of time. The recent price action has the stock moving higher and in reversal. The Q4 report sparked some volatility but it looks like bulls are still in charge. In the near-term, share prices may continue to move sideways or even pull back a little. Longer-term, I expect to see this move higher and regain a more-realistic price-multiple relative to its earnings, cash flow, and dividend. Trading at only 9X earnings this stock is a deep value but I don’t think it will last much longer.