Our view: MTL reported a solid Q2 result this morning, resulting in a nice +9% move in the stock today. However, even with that move, the company’s valuation (at a 40% discount to peers) still stands out as borderline egregious in our view. Amid a tough macro environment, MTL has delivered nicely on very impressive margin expansion, disciplined capital deployment, and strong FCF generation—all while maintaining a clean balance sheet. We see the valuation relative to this performance as extremely attractive. We reiterate our Outperform rating on the shares and raise our price target to $17 from $16.
Key points:
Q2 results nicely above. MTL reported adjusted EBITDA of $86MM, above consensus $78MM (RBCe: $77MM). As shown in Exhibit 1, margins were the main driver of the beat, at 17.3% well above our 15.2% on effective cost control. Revenue of $496MM was in line with consensus $494MM (RBCe: $504MM). Overall, a very solid quarter, with the margin beat providing a nice setup for when volumes recover.
Outlook fairly neutral. Management indicated that it feels the economy has bottomed at current levels, with potential for upside once the full impact of rate cuts kicks in. We view this as in-line to slightly bullish to prevailing sentiment.
M&A will be key. We were encouraged by management’s receptivity toward deploying capital on acquisitions. We note that at current leverage levels, the company has ample capacity to execute on tuck-ins, which we believe would continue to represent a nice opportunity for bolt-on growth. That said, management seemed somewhat reluctant to look to larger-scale M&A as a driver of growth. While we see this as the prudent approach, it begs the question whether larger M&A deals would provide a needed valuation catalyst for the shares.
Adjusting estimates. We raise our 2024 EBITDA estimate to $330MM (from $323MM), mainly on the back of better-than-expected Q2 results. We maintain our 2025 EBITDA estimate of $351MM, although we flag risk to the upside should the company execute on M&A, the pricing environment inflect, or margins sustain at current levels.
Our view. Despite the impressive 9% spike today, MTL shares are still trading at 5.8x EV/EBITDA (2025E), which we view as shockingly low for a quality company like MTL. This valuation represents a 40% discount to both Canadian-base peers TFII and AND, while free cash flow yield is a very attractive 11%. We believe this type of valuation is simply too good to ignore, and we reiterate (with conviction) the value opportunity we see in MTL shares today.