Ametek: Fairly Valued At Best
- Prior to the COVID-19 pandemic, AMETEK had demonstrated consistent growth across the board.
- After a year of pain on the top line, growth has resumed and the future for the enterprise looks bright.
- Even so, shares of the business are pricey and investors can probably find more attractive prospects elsewhere.
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Over the past couple centuries, industrial products have become more complex than our ancestors could probably have ever imagined. And in order for these products to work right and to be manufactured appropriately, they require their own complex components and tools. One provider of many of these types of products is a company called AMETEK (NYSE:AME). Despite experiencing a little bit of pain on its top line during the COVID-19 pandemic, AMETEK has generally seen its revenue expand year after year. With this, the company has benefited from growing profitability. The future for the business, quite frankly, looks encouraging. Because in addition to its own organic growth, it should continue to benefit from the various acquisitions management has engaged in. Having said that, such a high-quality prospect does not come cheap. And shares today are, at best, fairly valued, while at worst, they might be slightly overvalued.
A complex firm
Companies are rather simple in terms of the products and services they offer. Others are more complex. Our prospect, AMETEK falls in the latter category. Simply put, the company is a producer of industrial products that fall under two separate categories. One of these categories is called Electronic Instruments, and the other is called Electromechanical.
*Taken from AMETEK
In the Electronic Instruments Group, or EIG, the company designs and manufactures analytical, test, and measurement instruments for various industries. These include the aerospace, medical, and power markets. Its products include process control instruments used by the life sciences, pharmaceutical, semiconductor, automation, food and beverage, and other industries. It also provides instruments to research and laboratory equipment, to precision manufacturing firms, and others. It also provides aircraft and engine sensors, monitoring systems, and other technologies to the aerospace industry. In this particular segment, an impressive 73% of the company's sales are of process and analytical instruments. These include process analyzers, emission monitors, and spectrometers, as well as other instruments like them. The remaining 27% of sales in this segment come from aerospace and power instrumentation products.
The other key segment of the company, its Electromechanical Group, or EMG, Automation solutions, thermal management systems, specialty metals, and electrical interconnects to customers in a variety of industries. The industry overlap is much the same as what we covered in the firm’s other segment. According to management, 70% of sales associated with this segment include automation and engineered solutions like precision motion control solutions, brushless motors, blowers and pumps, and heat exchangers. The remaining 30% is dedicated to the aerospace market for which the company produces motor blower systems and heat exchangers.
During its 2020 fiscal year, AMETEK generated 65.9% of its revenue from its EIG unit. That segment was also responsible for 70.3% of the company's overall segment operating profits. Meanwhile, its EMG unit was responsible for the remaining 34.1% of sales and for the remaining 29.7% of profits the company generated. It is worth noting that on the whole, around half of the company's overall sales come from the US, with 56.4% of revenue attributable to North America more broadly. 21.8% of sales come from Europe, and the remaining 21.8% of sales come from Asia and other parts of the world.
*Taken from AMETEK
Operationally, management has behaved in a way that you would expect a management team in charge of a vibrant company to behave. Largely, they have focused a great deal on growth over the years, with 76% of the $10 billion in capital deployed since 2011 being dedicated to strategic acquisitions. Only 9% of capital has gone to dividends and 15% of capital has gone to share repurchases. It is important to know that the company continues to invest in acquisitions this year. In April of this year, for instance, the company acquired Abaco Systems for $1.35 billion, adding $350 million in annual revenue to it. In March of this year, it acquired Magnetrol for $230 million, bringing in additional revenue of $122 million on an annualized basis. Also in April, the company spent $230 million on NSI-MI in a move that will add $95 million in annual revenue to its income statement. And it also purchased two smaller companies for undisclosed terms that will bring in a combined $25 million in revenue to the company each year.
*Taken from AMETEK
As one might expect, a company that has been deploying so much capital for growth has achieved that growth. Between 2016 and 2019, revenue expanded from $3.84 billion to $5.16 billion. Revenue then declined in 2020 to $4.54 billion as a result of the COVID-19 pandemic. Fortunately for investors, this downturn was short-lived. In the first nine months of the 2021 fiscal year, the company generated sales of $4.04 billion. This represents an increase of 21% over the $3.34 billion achieved the same time one year earlier. For the full 2021 fiscal year, management expects sales to grow in the low 20% range, driven in part by a low-double-digit increase in organic revenue.
Profitability has followed revenue higher. Net income went from $512.2 million in 2016 to $872.4 million in 2020. Operating cash flow, meanwhile, has grown from $756.8 million to $1.28 billion. And EBITDA jumped from $966 million to $1.42 billion. So far this year, profitability continues to climb for the most part. Net income of $708.37 million is slightly higher than the $651.41 million generated the same time last year. Operating cash flow has fallen, dropping from $895.10 million to $878.56 million. But if you adjust for changes in working capital, it would have risen from $718.36 million to $939.51 million. Finally, EBITDA grew from $950.05 million to $1.20 billion. For the current fiscal year, management expects earnings per share to be about $4.77. This implies net profits of $1.10 billion. Applying that kind of growth rate to other profitability metrics would give us operating cash flow of $1.62 billion and EBITDA of $1.90 billion.
Taking these figures, we can effectively price the company. On a price to earnings basis, shares are trading at a multiple of 29.2. On a price to operating cash flow basis, the multiple is lower at 19.9. And using the EV to EBITDA approach, we end up with a multiple of 18.2. To put this all in perspective, I decided to compare the company to the five highest-rated of its peers as defined by Seeking Alpha’s Quant platform. On a price to earnings basis, these companies ranged from a low of 6.8 to a high of 29.3. Four of the five prospects were cheaper than our target. I then did the same thing using the price to operating cash flow approach, ending up with a range of 8.7 to 31.5. Once again, four of the companies were cheaper than AMETEK. Finally, I looked at the company from the perspective of its EV to EBITDA multiple, ending up with a range of 4.4 to 23.7. Not surprisingly, four of the five prospects were cheaper than AMETEK is today.
|Company||Price / Earnings||Price / Operating Cash Flow||EV / EBITDA|
|Encore Wire Corporation (WIRE)||6.8||12.3||4.4|
|Allied Motion Technologies (AMOT)||21.9||18.6||14.8|
|Acuity Brands (AYI)||25.0||18.8||14.8|
|Rockwell Automation (ROK)||29.3||31.5||23.7|
There's no doubt in my mind that AMETEK is an excellent company with a strong management team that has successfully created attractive value for shareholders over the years. Despite the decline in revenue experienced during the 2020 fiscal year, the overall trajectory for the company is promising. Having said that, shares do look rather lofty. This is to be expected for a high-quality firm. And because of how high quality the company looks, I don't think I can say that shares are drastically overpriced. At best, they are probably fairly valued. But more likely than not, they are slightly on the lofty side. And because of this, I suspect that while returns from the company will be positive for the foreseeable future, I do not think they will beat the market.
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This article was written by
Daniel is an avid and active professional investor. He runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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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