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Ametek Looking To Get Back To Meaningful M&A As Pandemic Challenges Ease

Apr. 05, 2021 2:15 PM ETAMETEK, Inc. (AME)1 Comment
Stephen Simpson profile picture
Stephen Simpson


  • Ametek is a leading player in a range of demanding, high-spec monitoring, testing, calibration, and control applications across a range of largely longer-cycle or acyclical end-markets.
  • M&A has always been a major part of the growth story, with Ametek favoring smaller, lower-risk bolt-on deals where there is a meaningful post-deal margin improvement opportunity.
  • Ametek isn't just an M&A story, as the company reinvests around 5% of its sales into R&D and continues to push its mix towards communications, sensing, and analysis.
  • Ametek shares aren't a clear bargain today, but the company has shown it can drive value from its model and the shares aren't priced out of line with other high-quality industrials.

If you want to find things to complain about with Ametek (NYSE:AME), be ready to put in a little extra work. It's possible to fault the relatively low returns of capital to shareholders and the generally high multiples the shares trade at, but neither are particularly damning in my book.

Ametek has shown over and over again that it can identify value-adding M&A targets and then build upon those deals with strong margin improvement (a la Danaher (DHR) and Fortive (FTV)), while reinvesting in the businesses to maintain their competitiveness and pricing power. That, in turn, has driven strong revenue (6% annualized growth for over a decade), good margins, strong (and improving) FCF margins, and above-average returns to shareholders.

Ametek presents two challenges for more fundamentally-inclined GARP-style investors. First, M&A is core to the business plan, but challenging to model on a year-to-year basis. Second, the company is a cash-generating machine and rarely trades at what look like conventionally cheap valuations.

I am concerned about the potential future impact on the share price from today's low rates and somewhat stretched industrial valuations, but I believe Ametek is in that upper echelon of high-quality industrials, and I believe the prospective returns today (mid-to-high single-digits) are in line to slightly better than the peer group average, and Ametek still offers some relative value.

Not Really A Short-Cycle Leverage Story

Ametek should see better demand in 2021, but this isn't a short-cycle recovery story like Illinois Tool Works (ITW) or Parker-Hannifin (PH). A lot of the markets that Ametek serves are either mid-to-late cycle markets (aerospace, oil/gas, metals, power) or not particularly cyclical. This isn't really an indictment of the company, but it does mean that investors should temper their expectations for the same sort of strong year-over-year improvements they may seem from more short-cycle

This article was written by

Stephen Simpson profile picture
Stephen Simpson is a freelance financial writer and investor. Spent close to 15 years on the Street (sell-side, buy-side, equities, bonds); now a semi-retired raccoon rancher. That last part isn't entirely true. Probably.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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