Montrose (MEG)

Environmental services provider Montrose (NYSE:MEG) beat Wall Street’s revenue expectations in Q3 CY2025, with sales up 25.9% year on year to $224.9 million. The company’s full-year revenue guidance of $820 million at the midpoint came in 0.6% above analysts’ estimates. Its non-GAAP profit of $0.36 per share was 11.6% above analysts’ consensus estimates.

Company Overview

Founded to protect a tree-lined two-lane road, Montrose (NYSE:MEG) provides air quality monitoring, environmental laboratory testing, compliance, and environmental consulting services.

Waste management companies can possess licenses permitting them to handle hazardous materials. Furthermore, many services are performed through contracts and statutorily mandated, non-discretionary, or recurring, leading to more predictable revenue streams. However, regulation can be a headwind, rendering existing services obsolete or forcing companies to invest precious capital to comply with new, more environmentally-friendly rules. Lastly, waste management companies are at the whim of economic cycles. Interest rates, for example, can greatly impact industrial production or commercial projects that create waste and byproducts.

Montrose Environmental Group competes with environmental divisions of larger engineering and consulting firms such as ERM, Ramboll, WSP, AECOM, and Tetra Tech, as well as specialized environmental testing companies like Eurofins and Pace Analytical.

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Thankfully, Montrose’s 23.5% annualized revenue growth over the last five years was incredible. Its growth beat the average industrials company and shows its offerings resonate with customers, a helpful starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Montrose’s annualized revenue growth of 17.6% over the last two years is below its five-year trend, but we still think the results suggest healthy demand.

This quarter, Montrose reported robust year-on-year revenue growth of 25.9%, and its $224.9 million of revenue topped Wall Street estimates by 10.9%.

Looking ahead, sell-side analysts expect revenue to decline by 1.3% over the next 12 months, a deceleration versus the last two years. This projection is underwhelming and indicates its products and services will see some demand headwinds. At least the company is tracking well in other measures of financial health.

Montrose’s unit economics are great compared to the broader industrials sector and signal that it enjoys product differentiation through quality or brand. As you can see below, it averaged an excellent 37.5% gross margin over the last five years. Said differently, roughly $37.48 was left to spend on selling, marketing, R&D, and general administrative overhead for every $100 in revenue.

This quarter, Montrose’s gross profit margin was 39.4%, down 1.5 percentage points year on year. On a wider time horizon, however, Montrose’s full-year margin has been trending up over the past 12 months, increasing by 1.4 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as manufacturing expenses).

Montrose’s operating margin has been trending up over the last 12 months, but it still averaged negative 2.5% over the last five years. This is due to its large expense base and inefficient cost structure. It might have a shot at long-term profitability if it can scale quickly and gain operating leverage.

Analyzing the trend in its profitability, Montrose’s operating margin might fluctuated slightly but has generally stayed the same over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Montrose generated an operating margin profit margin of 4.4%, up 5.1 percentage points year on year. The increase was solid, and because its gross margin actually decreased, we can assume it was more efficient because its operating expenses like marketing, R&D, and administrative overhead grew slower than its revenue.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Montrose’s full-year EPS flipped from negative to positive over the last five years. This is a good sign and shows it’s at an inflection point.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

Montrose’s EPS grew at an astounding 109% compounded annual growth rate over the last two years, higher than its 17.6% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into Montrose’s earnings to better understand the drivers of its performance. Montrose’s operating margin has expanded over the last two years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; interest expenses and taxes can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q3, Montrose reported adjusted EPS of $0.36, down from $0.41 in the same quarter last year. Despite falling year on year, this print easily cleared analysts’ estimates. Over the next 12 months, Wall Street expects Montrose’s full-year EPS of $1.35 to shrink by 10.7%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Montrose has shown weak cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 3.7%, subpar for an industrials business.

Taking a step back, an encouraging sign is that Montrose’s margin expanded by 6.6 percentage points during that time. The company’s improvement shows it’s heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability was flat.

Montrose’s free cash flow clocked in at $22.33 million in Q3, equivalent to a 9.9% margin. This result was good as its margin was 4.2 percentage points higher than in the same quarter last year, building on its favorable historical trend.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although Montrose has shown solid business quality lately, it struggled to grow profitably in the past. Its five-year average ROIC was negative 3.5%, meaning management lost money while trying to expand the business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Montrose’s ROIC has stayed the same over the last few years. We still think it’s a good business, but if the company wants to reach the next level, it must improve its returns.

Montrose reported $6.74 million of cash and $369.3 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $119.5 million of EBITDA over the last 12 months, we view Montrose’s 3.0× net-debt-to-EBITDA ratio as safe. We also see its $19.02 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Montrose blew past analysts’ EBITDA expectations this quarter. We were also excited its revenue outperformed Wall Street’s estimates by a wide margin. Zooming out, we think this was a good print with some key areas of upside. The stock traded up 14.1% to $28.03 immediately after reporting.

Updated: December 4, 2025 at 10:28 PM EST

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Montrose, you should also grasp the company’s longer-term business quality and valuation.

We think Montrose is a good business. To kick things off, its revenue growth was exceptional over the last five years. And while its relatively low ROIC suggests management has struggled to find compelling investment opportunities, its rising cash profitability gives it more optionality. On top of that, its astounding EPS growth over the last five years shows its profits are trickling down to shareholders.

Montrose’s P/E ratio based on the next 12 months is 20.3x. Looking at the industrials landscape right now, Montrose trades at a pretty interesting price. If you’re a fan of the business and management team, now is a good time to scoop up some shares.

Wall Street analysts have a consensus one-year price target of $32.50 on the company (compared to the current share price of $26.08), implying they see 24.6% upside in buying Montrose in the short term.