Matthews International Corporation (MATW)

Executive Summary / Key Takeaways

• Portfolio transformation is de-risking the business: Matthews International has surgically removed its commoditized Brand Solutions segment (SGK) and is selling its Warehouse Automation business, using $410 million in combined proceeds to slash debt from $711 million toward a target leverage ratio of 3.0x or less, fundamentally improving the risk profile.

• Tesla (TSLA) arbitration victory unlocks hidden industrial tech value: After two years of litigation that suppressed marketing and customer engagement, a February 2025 arbitrator ruling affirmed Matthews' DBE technology ownership, re-energizing a pipeline with over $150 million in active quotes and validating a technology that operates at 2x the speed of competitive lines.

• Cost reset exceeds expectations: A cost reduction program launched in Q4 2024 is on track to surpass the initial $50 million annual target, with run-rate savings of $25-30 million expected by end of FY2025 and the remainder by FY2026, directly supporting margin recovery in the Industrial Technologies segment.

• Memorialization remains a defensive anchor: Despite a challenging U.S. death rate environment, this segment generated $809.5 million in sales and $169.5 million in adjusted EBITDA in FY2025, with the Dodge acquisition adding $12 million in annual EBITDA and Keystone Memorials expanding into high-margin personal mausoleums.

• Valuation disconnect reflects transition, not terminal decline: Trading at 8.1x EV/EBITDA with a market cap of $836 million, the market underappreciates that pro forma for asset sales, Matthews will be a leaner, higher-margin industrial technology and memorialization company with multiple underappreciated growth levers.

Setting the Scene: From Industrial Conglomerate to Focused Technology Play

Matthews International Corporation, founded in 1850 and headquartered in Pittsburgh, Pennsylvania, spent 170 years building a sprawling industrial conglomerate spanning memorial products, industrial equipment, and brand services. For decades, this diversification provided stability but masked a critical flaw: the company was a collection of average businesses in declining or commoditizing industries, with no clear competitive moat. The Brand Solutions segment, historically generating over $500 million in annual revenue, faced relentless pressure from digital disruptors and low-cost design platforms, while the Industrial Technologies segment struggled with customer concentration and cyclical capital spending.

The company's place in the value chain reveals why this matters. In memorialization, Matthews operates as a manufacturer and distributor to funeral homes and cemeteries, competing against vertically integrated players like Service Corporation International (SCI) that control both service and product delivery. In industrial technologies, the company supplies niche equipment for battery manufacturing and product identification, competing against automation giants like Dover Corporation (DOV) with substantially greater scale and R&D resources. This positioning left Matthews squeezed between larger competitors with cost advantages and smaller, more agile specialists.

Recent strategic shifts reflect a stark recognition of this reality. The May 2025 SGK divestiture, which contributed the majority of Brand Solutions to Propelis in exchange for a 40% stake, $50 million in preferred equity, and $250 million in cash, was not merely a portfolio trim—it was an admission that the company could not compete effectively in commoditized brand services. The pending $230 million sale of Warehouse Automation to Duravant LLC similarly exits a business where Matthews lacked scale and faced intense competition from Amazon Robotics (AMZN) and Siemens (SIEGY). These moves matter because they signal management's willingness to shrink to grow, focusing capital and attention on segments where the company possesses genuine technological differentiation.

Technology, Products, and Strategic Differentiation: The DBE and Axian Opportunities

Matthews' industrial technology moat rests on two underappreciated innovations that were obscured by portfolio complexity and legal overhang. The first is its dry battery electrode (DBE) technology , a calendaring and coating system for lithium-ion batteries that eliminates solvents from the production process. This isn't incremental improvement—it's a fundamental process change that makes batteries cheaper, more environmentally sustainable, and better suited for next-generation solid-state designs. The technology operates at up to 2x the speed of competitive lines, a productivity advantage that directly translates to lower cost per unit for battery manufacturers.

Why this matters now: for nearly two years, Tesla's litigation prevented Matthews from actively marketing DBE solutions to third parties, creating a chilling effect on customer engagement and order conversion. The February 2025 arbitration ruling, which affirmed Matthews' "long history, extensive R&D, and patent portfolio" in DBE technology, removed this constraint. Since mid-February, the company has generated over $150 million in quotes for DBE solutions, secured a production-scale order from a U.S. solid-state battery manufacturer, and is pursuing a $50 million battery separator coating line order expected to convert in early FY2026. The pipeline extends beyond electric vehicles into grid storage, the fastest-growing segment of battery development, where DBE's ability to produce thicker electrodes offers a compelling value proposition.

The second innovation is the Axian printhead, launched in October 2025, which represents a breakthrough in product identification technology. Unlike traditional inkjet systems with open-flow architectures that require frequent maintenance shutdowns, Axian uses a patented silicon-based print engine with disposable printhead technology . This design allows for replacement in minutes rather than hours, reducing downtime and total cost of ownership by approximately 30%. The product has received GS1 certification as the only jetting unit able to meet 2D code quality standards at high speeds, positioning it perfectly for the global Sunrise 2027 initiative that will transition retail barcodes from 1D to 2D formats.

The economic implications are significant. Axian targets a $2 billion addressable market in fast-moving consumer goods, but more importantly, its embedded technology requires proprietary Matthews ink, creating a high-margin recurring revenue stream. This razor-and-blade model, combined with the system's reliability advantages, provides pricing power in a market where Dover's Markem-Imaje division competes with more conventional solutions. For Matthews, Axian represents a path to shift Industrial Technologies from cyclical equipment sales to more predictable consumables revenue.

Financial Performance & Segment Dynamics: Evidence of Strategic Execution

FY2025 results demonstrate the financial impact of Matthews' strategic reset. Consolidated sales of $1.50 billion declined from $1.80 billion in FY2024, but this 16.6% drop was entirely attributable to the SGK divestiture. On a pro forma basis, the remaining business showed resilience despite headwinds. Adjusted EBITDA of $187.5 million declined from $205.2 million, yet this included $22.2 million in legal fees from the Tesla dispute and approximately $45.4 million in working capital outflows related to the litigation. Excluding these one-time impacts, underlying EBITDA would have been roughly flat year-over-year, suggesting the cost reduction program is already offsetting operational pressures.

Segment performance reveals the divergent trajectories within the portfolio. Memorialization, the company's largest segment at $809.5 million in sales, generated $169.5 million in adjusted EBITDA despite a challenging U.S. death rate environment that pressured casket and granite memorial volumes. The segment's ability to maintain margins reflects successful inflationary pricing and the strategic Dodge acquisition, which contributed approximately $11 million in Q4 sales and is expected to add $12 million in annual EBITDA. The Keystone Memorials acquisition in October 2025 further expands the segment into personal mausoleums, a higher-margin niche. While competitors like Hillenbrand's (HI) Batesville casket business face similar volume pressures, Matthews' cremation-focused product mix positions it better for the structural shift toward cremation, which now represents approximately 60% of U.S. deaths.

Industrial Technologies presents a more complex story. FY2025 sales of $342.2 million declined sharply from $433.2 million in FY2024, driven by the Tesla dispute's chilling effect, customer delays in energy storage projects, and the shutdown of the unprofitable automotive business. Adjusted EBITDA collapsed to $27.9 million from $39.7 million, reflecting both revenue decline and litigation costs. However, the segment is at an inflection point. The warehouse automation business, which is being sold for $230 million (over 15x adjusted EBITDA), showed strong order intake and backlog growth in Q3 and Q4. The engineering business, while depressed, is seeing cost reduction actions that should yield $25-30 million in annual savings. Most importantly, the DBE and Axian technologies provide clear growth catalysts that were previously unmarketable.

Brand Solutions has been reduced to a shadow of its former self. Following the SGK divestiture, Q4 sales were just $16.2 million, down from $135.9 million, consisting only of European packaging operations. The 40% stake in Propelis, which projects $100 million in initial annual EBITDA and targets $60 million in synergies, represents a call option on the brand solutions industry's consolidation. Matthews intends to exit this investment after synergies are achieved, expecting an additional $300 million in proceeds, which would represent a significant return on the retained stake.

The balance sheet reflects the strategic reset in progress. Net debt of $678 million at September 30, 2025. The company expects to apply $228 million in SGK proceeds, $160 million in net proceeds from the Warehouse Automation sale, and approximately $30 million from the European packaging divestiture directly to debt reduction. This would reduce net debt to approximately $260 million by mid-FY2026, achieving its target leverage ratio of 3.0x or less. This deleveraging matters because it reduces interest expense, improves financial flexibility, and positions the company to invest in DBE and Axian growth without balance sheet constraints.

Outlook, Management Guidance, and Execution Risk

Management's FY2026 guidance of at least $180 million in adjusted EBITDA, inclusive of the 40% Propelis interest, implies a modest decline from FY2025's $187.5 million. This conservative outlook reflects several factors: the full-year loss of EBITDA from divested businesses, continued investment in DBE technology commercialization, and the impact of transition services agreements that temporarily limit overhead reduction. However, the guidance likely understates potential upside. The cost reduction program is tracking ahead of the initial $50 million target, with savings weighted toward FY2026. The Dodge acquisition will contribute a full year of EBITDA, and the DBE pipeline conversion could add material revenue if the $50 million battery separator order and other quotes materialize.

The key execution risk lies in converting DBE opportunities into firm orders. While the arbitration victory removed legal barriers, the energy storage market remains challenging. EV battery overcapacity, particularly in China, has delayed capital spending by manufacturers. However, this creates a longer-term opportunity as the industry consolidates and focuses on more efficient production technologies. Matthews' DBE solution, with its 2x speed advantage and solvent-free process, is particularly well-suited for solid-state batteries and grid storage applications where thicker electrodes provide performance benefits. The company's challenge is to convert its $150 million quote pipeline into orders before competitors develop comparable solutions, though management notes that "no one has yet to develop a competitive solution as of yet."

In Memorialization, the outlook is more stable. The full-year contribution from Dodge and the Keystone acquisition should drive modest growth, offsetting continued pressure from declining U.S. death rates. The segment's defensive characteristics provide a valuable anchor, generating consistent cash flow to fund industrial technology investments. Compared to peers like Service Corporation International, which trades at 12.1x EV/EBITDA with slower growth, Matthews' memorialization business appears undervalued within the consolidated entity.

Corporate costs represent another execution variable. Management acknowledged that "multiple transition services agreements from various divestitures will limit our ability to take more significant action to reduce overhead," but expects corporate costs to be "materially lower" after these agreements expire in FY2026. This timing aligns with the completion of the cost reduction program, suggesting a potential step-down in SG&A that could drive EBITDA margins above guidance.

Risks and Asymmetries: What Could Break the Thesis

The most immediate risk is the continuation of Tesla litigation. Despite winning the initial arbitration, Tesla filed a third arbitration demand on September 8, 2025, alleging breach of warranty and contract. While management maintains these claims are "without merit" and is pursuing counterclaims, continued legal expenses could pressure cash flow. The company incurred $22.2 million in legal fees in FY2025, and a protracted dispute could delay DBE customer conversions if potential buyers fear ongoing legal entanglements. The asymmetry here is stark: a complete legal victory would remove overhang and accelerate DBE adoption, while an adverse ruling could jeopardize the entire technology platform.

The Propelis investment carries concentration risk. As a 40% minority partner, Matthews lacks control over strategy and operations. Propelis projects $100 million in initial EBITDA and $60 million in synergies, but if integration challenges or market pressures cause it to miss these targets, Matthews' investment could be impaired. Management warned that "should some or all of these risks come to fruition, the Company may realize losses related to its investment in Propelis, which could have a material negative effect." The asymmetry is limited upside (eventual exit for ~$300 million) versus potential full impairment if the brand solutions market deteriorates further.

Execution risk on cost reductions could pressure margins. While the program is tracking ahead of target, the engineering business in Industrial Technologies requires additional actions to "mitigate any further declines as we work towards converting several opportunities into orders." If DBE orders fail to materialize and warehouse automation revenue is lost post-divestiture, the segment could face another year of EBITDA decline, offsetting savings elsewhere.

Finally, demographic trends in Memorialization pose a structural headwind. U.S. death rates have declined, pressing casket and granite memorial volumes. While cremation rates are rising (benefiting Matthews' urn and cremation equipment offerings), the net effect is a challenging volume environment. If death rates normalize lower post-COVID, the segment's growth will depend entirely on pricing, acquisitions, and market share gains against larger competitors like SCI and Hillenbrand.

Valuation Context: Pricing a Transformation

At $27.16 per share, Matthews trades at a market capitalization of $836 million and an enterprise value of $1.51 billion, reflecting net debt of $678 million. The EV/EBITDA multiple of 8.1x based on FY2025 adjusted EBITDA of $187.5 million sits in the middle of its peer range. Service Corporation International trades at 12.1x, Hillenbrand at 9.7x, and Dover at 16.1x. However, this comparison is imperfect because Matthews' EBITDA includes $22.2 million in one-time legal fees and reflects a business in transition. Pro forma for cost savings, DBE growth, and debt reduction, the forward multiple appears more attractive.

The company's dividend yield of 3.75% and 32-year streak of consecutive increases provide income support, though the 113% payout ratio suggests the dividend will be funded from asset sale proceeds rather than operating cash flow in the near term. This is a reasonable use of capital given the balance sheet priority, but investors should expect dividend growth to pause until earnings recover.

Valuation must also account for the Propelis stake, which management values at approximately $300 million upon exit. This represents 36% of Matthews' current market cap, suggesting the market is either skeptical of the valuation or applying a heavy discount for minority ownership and execution risk. The warehouse automation sale at 15x EBITDA validates management's claim that "the value of our Warehouse Automation business was highly underappreciated by the market," supporting the view that other industrial assets may be similarly undervalued.

The key valuation driver will be debt reduction progress. If Matthews achieves its target leverage ratio of 3.0x or less by mid-FY2026, interest expense could decline by $15-20 million annually, directly boosting earnings power. Combined with cost savings and DBE revenue, this could drive EBITDA toward $200 million, making the current valuation appear conservative.

Conclusion: A Transformed Company at an Inflection Point

Matthews International has completed a strategic reset that the market has yet to fully recognize. By divesting non-core assets, the company has simplified its structure, strengthened its balance sheet, and focused capital on segments with genuine technological differentiation. The Tesla arbitration victory was a critical catalyst, removing legal overhang and validating DBE technology that could address a multi-billion dollar market in battery manufacturing and grid storage.

The investment thesis hinges on execution: converting the $150 million DBE quote pipeline into orders, realizing cost savings beyond the $50 million target, and achieving the projected $300 million exit value for the Propelis stake. While Memorialization provides a defensive anchor, the upside lies in Industrial Technologies' transformation from a cyclical equipment provider to a technology leader in battery manufacturing and product identification.

The primary risk is that DBE adoption remains slower than anticipated due to EV battery overcapacity, while continued Tesla litigation creates customer hesitation. However, the company's 175-year history of adaptation, combined with a now-cleaner balance sheet and proven cost discipline, provides a foundation for recovery. For investors willing to look past the transition noise, Matthews offers exposure to critical battery technology and industrial automation trends at a valuation that doesn't yet reflect the transformation's potential. The next 12 months will be decisive: successful DBE order conversion and debt reduction could drive a significant re-rating, while execution missteps would validate the market's current skepticism.