New Guidance Leads Avondale To Upgrade Matrix Service Co.

Avondale Partners has upgraded Matrix Service Co MTRX to Market Outperform, despite weak third-quarter results and a guidance cut. The firm cited attractive valuation on the new guidance as justification for the upgrade. The shares rose 7 percent in Friday's morning trade.

The brokerage said, "Shares trade at only 4.4x/3.7x our new FY16/17 EBITDA of $72 million/$85 million, a substantial discount to peers and the lowest level since 2011."

"We don't see an immediate catalyst but investors get an inexpensive name with leverage to a recovery in commodities, optionality on contract wins, a strong current backlog position and exposure to M&A," analyst Daniel Mannes explained.

Mannes also noted that the diversified energy/industrial services company gets 70 percent of its revenues from storage solutions and electric businesses and both are poised for growth.

Related Link: KeyBanc Downgrades Matrix Service To Sector Weight

Although the outlook cut was driven by weakness in its oil, gas and chemical (OG&C) unit, the analyst expects the business to record modest profits in 2017.

Noting that Matrix maintains a strong balance sheet, Mannes said, "At current valuations MTRX is likely attractive to others as well."

However, the analyst has cut his 2016 revenue estimate to $1.3 billion on lower revenues in OG&C, industrial and to a lesser degree storage. As a result, Mannes currently expects 2016 EPS at $1.07 down $0.32 from his prior estimate but within company's new guidance range of $1.00–$1.10.

According to TipRanks, Mannes has a success rate of 50 percent with an average return per recommendation of +29.8 percent. The analyst is ranked 1,111 out of 3,899 analysts.

Mannes cut the price target on the stock by $2 to $20 (40 percent upside). At time of writing, Matrix was up 5.53 percent on the day, trading at $15.07.