MTS Systems Stock Is Setting Up for a Breakout

MTS Systems stock
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MTS Systems: A Pick for Contrarian Investors

If you like to seek out contrarian situations, what you want are companies that are showing some signs of turning around. An intriguing small-cap technology stock that fits this objective is MTS Systems Corporation (NASDAQ:MTSC).

MTSC is a provider of testing and sensing hardware and software solutions used by global manufacturers in the critical design and manufacturing phases.

MTS Systems deals with a broad line of clients in aerospace, biomedical, civil engineering, energy, geomaterials, ground vehicles, industrial manufacturing, materials testing, and rail.

The company has been striving to turn things around after a few rough years of inconsistency in revenues and earnings, but the prospects appear to be on the upward path.

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On the chart, MTSC stock has underperformed, declining 1.2% this year and being up only 3.2% over the past year.

Chart courtesy of StockCharts.com

My bullish thesis is driven by a potential turnaround that could lift MTSC stock to above one-year resistance at $53.00 and $55.40. A break could see the stock price target the $66.00 level from October 2015 and the $71.00 level from December 2013.

Why MTSC Stock Could Break Higher

While MTS Systems stock is approaching its 52-week high, its underperformance versus the Nasdaq and Russell 2000 benchmarks was due to inconsistent results.

Revenues declined in fiscal-year 2014 and 2015, albeit the rate was marginal, at less than one percent. MTS Systems came back with strong revenue growth of 16.2% and 21.1% in fiscal-years 2016 and 2017, respectively.

Fiscal Year Revenue (Millions) Growth
2013 $568.7
2014 $563.2 -1.0%
2015 $559.6 -0.6%
2016 $650.5 16.2%
2017 $787.5 21.1%

(Source: “MTS Systems Corp.,” MarketWatch, last accessed July 5, 2018.)

MTS Systems is estimated to continue delivering higher revenues but at a lower rate compared to the last two fiscal years.

For fiscal-year 2018, MTSC is predicted to record revenue growth of 2.3% to $806.3 million, followed by a slightly better 5.7% to $852.6 million in fiscal-year 2019. (Source: “MTS Systems Corporation (MTSC),” Yahoo! Finance, last accessed July 6, 2018.)

While the revenue picture could be better, I’m encouraged by MTS Systems managing to grow its gross earnings at a higher rate versus revenues in fiscal-year 2017. This reflects a control of direct costs.

Fiscal Year Gross Earnings Growth
2014 -2.2%
2015 -4.8%
2016 8.2%
2017 31.0%

(Source: MarketWatch, op cit.)

Along with the gross earnings improvement, MTSC has produced positive earnings before interest, tax, depreciation, and amortization (EBITDA) in five straight years, including strong growth in fiscal-year 2017 after three years of declines.

Fiscal Year EBITDA (Millions) Growth
2013 $95.8
2014 $84.8 -11.5%
2015 $78.3 -7.6%
2016 $68.4 -12.6%
2017 $94.0 37.3%

(Source: Ibid.)

On the bottom line, MTS Systems is profitable, but the company delivered lower generally accepted accounting principles (GAAP) earnings in fiscal-years 2014, 2016, and 2017.

There is optimism as MTS Systems is estimated to report adjusted earnings of $2.35 per diluted share in fiscal-year 2018 and as much as $3.53 per diluted share in fiscal-year 2019.

The key free cash flow (FCF) metric has been positive in four straight years, with growth in three of the past four years. This is impressive, given that earnings fell during the years that FCF grew.

Fiscal Year Free Cash Flow (Millions) Growth
2013 -$31.8
2014 $44.6 240.6%
2015 $82.0 83.7%
2016 $47.0 -42.6%
2017 $53.9 14.4%

(Source: Ibid.)

Analyst Take

The prospects look positive for MTS Systems stock as the company looks to deliver consistency. The forward multiple of 16.5 times is reasonable.

MTSC stock is not cheap by any means, with a price/earnings to growth (PEG) ratio of 2.2, but, if the company can turn things around and deliver stronger growth, the valuation would be more attractive.

Insiders at MTS Systems have been buying the company’s shares, perhaps foreshadowing things to come.