MIR - Mirion Technologies Q1 Performance: Growth Potential Amid Macro Challenges

2023-05-04 13:37:18 ET

Summary

• Mirion Technologies, Inc. reported an impressive top line performance for Q1, with an 11.6% surge in revenue reaching $182.1 million, signaling strong demand for the company's products and a margin expansion.
• In Q1, Mirion experienced robust performance in its medical segment, fueled by positive underlying market momentum and order strength in the labs and research space of its Technologies segment.
• However, Mirion revealed a significant inventory build-up, contributing to the company's cash generation challenges.

Thesis

In this analysis, I delve into the commendable Q1 performance of Mirion Technologies, Inc. (MIR) by examining the company's diverse portfolio, involvement in high-profile projects, and growth potential in the medical and defense sectors. This is in order to understand the underlying factors contributing to their financial results and determine whether MIR stock is a worthy long-term investment.

Q1 Performance

Mirion Technologies is a prominent provider of radiation detection, measurement, and analysis solutions, employing roughly 2,800 people with operations in 13 countries. It has recently reported an impressive top-line performance for Q1 by showcasing an 11.6% surge in revenue , reaching $182.1 million. This signals a strong demand for the company's extensive range of products along with a margin expansion exceeding 1,000 basis points and substantial free cash flow conversion. Moreover, during the conference call , the company reported that it's well-positioned to enhance its free cash flow conversion throughout the year.

Most recently, diving into their fundamentals, you'll notice that one of the key contributing factors to Mirion's advanced technological capabilities is their participation in the European Space Agency ((ESA)) JUICE Mission . If you happened to missed the headlines, ESA’s Jupiter Icy Moons Explorer was successfully launched on an Ariane 5 rocket from Europe’s Spaceport in French Guiana on April 14. Mirion's participation represents a global collaboration that engaged 2,000 people from 18 institutions, 23 countries, and 83 companies.

Medical and Technologies Segments

Back on Earth, in Q1, Mirion experienced robust performance in their medical segment , fueled by positive underlying market momentum and order strength in the labs and research space of their Technologies segment. Also, the company's substantial order for civil defense applications in the French market, I believe, underscores its potential for ongoing growth in the defense sector compounded by its knack for acquiring assets and optimizing margins, as illustrated by the accretive Biodex divestment . Moreover, according to management, investments in the digital aspect of their SIS business are anticipated to yield benefits across the entire technologies division in the medium to long term. This has the potential to expand their slice of the pie within the global defense market that's projected to be valued at $577.19 billion this year.

Diving in deeper to its Q1 results, MIR showcased a 10% growth in the aforementioned medical segment and an international quarter that exceeded management's expectation with revenue adding to another slice within the medical technology market that's forecasted to reach $579.40 billion throughout this year, with an annual growth rate of 4.91% up to 2027. And, according to management, Mirion anticipates improvements in supply chain issues during the latter half of the year, and if this proves to be the case, they're bound to see an enhancement in their margin performance.

Mirion also dabbles in the burgeoning small modular reactor ((SMR)) market - a sector considered the next frontier in nuclear technology - with a comprehensive solution portfolio, including the newly acquired Collins Infrastructure business which supplies the digital and security backbone vital for new reactor sites. Overall, though, the market is not as big as I thought it would be, with a total Research and Development budget for nuclear energy allocated by the Department of Energy of the United States that was around 1.65 billion dollars in 2022. However, during the quarter, Mirion recorded a somewhat commendable $2 million in backlog related to SMR projects. That could signify continued momentum in this market.

Risks and Headwinds

However, Mirion Technologies faces concerns regarding margins and cash generation, which, at the time of this analysis, don't seem to be a concern by the market, as evidence by its muted price movement post earnings. When asked on the call about cash generation, CFO Brian Schopfer noted:

...we continue to march towards net working capital being a source of cash this year. And I think I have said that I think it’s back – it’s more back-end loaded as we work through all of this in the first half of the year.

Furthermore, Mirion encountered an unanticipated decline in its SIS business, which negatively impacted the company's margin by 250 basis points. Although this drag is projected to lessen in the second quarter, this business is relatively new to Mirion, and, therefore, unforeseen costs may arise in the future. Moreover, the company's overall order strength was unremarkable, with the exception of the medical segment and the labs and research space within the Technologies segment. Despite growth potential in the defense sector, the timeline for the order flow translating into P&L seems to remain uncertain.

As inventory is concerned, MIR revealed a significant inventory build-up, which contributed to the company's cash generation challenges. With supply chain issues thrown in, if they continue to persist in the second quarter, I believe that it will most certainly lead to further margin pressure. CFO Brian Schopfer echoed this view, with a silver lining thrown in, by stating:

I think what – in the first half, we know – we knew and continue to know we will have a bit of margin challenges here. You saw it in the first quarter. I think you’ll see it a bit more in the second quarter. But again, that visibility we have on the backlog gives us very good confidence in the back half of the year, seeing the margin performance pick up. And so I think, yes, I think, yes, I think we have another quarter a bit of margin pressure here in the second quarter and then the back half looks better

Finally, while Mirion is collaborating with leading players in the Small Modular Reactor market, these projects are still in their infancy. I perceive this as supplementary to the company's existing utility-scale nuclear business. Therefore, we can cautiously assume that t he profitability of the SMR market is going to be uncertain for the next few years.

Final Takeaway

Mirion Technologies, Inc. reported a commendable Q1 performance, with an 11.6% revenue surge, margin expansion, and promising free cash flow conversion. Despite some risks, such as margin pressures and supply chain challenges, I believe Mirion Technologies, Inc.'s diverse portfolio and growth potential in the medical and defense sectors make it a stock worth holding.

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