AMETEK (NYSE:AME) has exemplified strong growth through outperformance for the past 20 years and has recently demonstrated their resiliency within the past year. With strong organic growth and new streams through acquisitions and a significant position in the industry, I would rate this stock a hold as it is accompanied by overvaluation as explained later in this article.
AMETEK is a global leader in electronic instruments and electromechanical devices. The company designs and manufactures advanced analytical, monitoring, testing, and imaging instruments for a wide range of industries, including aerospace, defense, medical, automotive, and industrial markets.
The company has two operating segments: Electronic Instruments Group and Electromechanical Group. The EIG segment provides advanced analytical and monitoring instruments that measure, analyze, and monitor a wide range of physical parameters, such as pressure, temperature, level, and gas analysis. The EMG segment provides highly engineered electromechanical connectors, motors, and systems that are used in various applications, including aerospace, defense, medical, and industrial markets.
AMETEK has a strong global presence with operations in more than 30 countries and sales in more than 150 countries. The company has a diverse customer base, including Fortune 500 companies, small and medium-sized businesses, and government agencies.
With a market capitalization of $33.47 billion, a growing ROIC of 11.21%, a 52-week high of $148.06, and a low of $106.17, a price of $145.33 with a 29.01 P/E for AMETEK displays a price that is at an all-time high and possibly indicates overvaluation in the stock.
AMETEK also pays a small but healthy dividend of 0.63% representing a safe payout ratio of 17.57% creating major space for FCF to use within the company to grow aggressively and execute their strategies such as strategic acquisitions and differentiating their products from the mainstream market. The company has also bought back a small number of shares which I remain positive about because the purchase of minimal shares can enable the company to use excess FCF while also avoiding large allocations of FCFs to expensive shares.
With Q4 2022 results exceeding expectations on the top and bottom lines with a 3.31% beat on earnings per share ($1.47 compared to $1.52) and a 2.46% beat on revenue ($1.59 billion compared to $1.63 billion), AMETEK is beating expectations amid moderate economic headwinds. AMETEK also achieved a record-breaking sales figure of $1.63 billion, representing an 8% rise compared to the same period in 2021. The growth in sales was mainly organic, with a 9% increase. Furthermore, the company's operating income also reached a record high of $398 million, displaying a 10% rise. Moreover, the operating margins were reported at 24.5%, indicating a 50 basis points increase from the operating margins reported in the fourth quarter of 2021. Some positive guidance in 2023 includes, mid-single digits increase in overall sales for the year compared to 2022 and adjusted earnings per diluted share to be within the range of $5.84 to $6.00, indicating a 3% to 6% growth compared to the corresponding basis for 2022. I believe that this demonstrates AMETEK's ability to remain successful even in times of economic pullback where there is possible instability in inflation and corresponding interest rates impacting consumer purchase sentiment.
Outperforming the Broader Market
AMETEK's constant reinvestment of FCF's into their business model to generate differentiation has enabled the company to complete several strategic acquisitions. AMETEK has the ability to utilize strong integration of new segments to constantly outperform the broader market and continuously compound its growth.
Strategic Acquisitions Promote Continuous Growth and Operational Excellence
AMETEK's strong financial performance such as their EBITDA margin of 29.7% accompanied by their asset-light business model should drive strong and consistent cash flow generation. With such recurring cash flows, AMETEK can consistently acquire companies that can support its core business model and upgrade its efficiency. This strategy has proven to remain effective as AMETEK has allocated 70% of their FCFs to acquisitions since 2013 as displayed below and demonstrated that they are able to integrate new processes to increase operational efficiencies. This strategy will continue in the future as the company has highlighted its importance and that they hold $2.3 billion in liquidity and that significant debt does not mature until 2024. These acquisitions have all been able to achieve +20% profit within the first 3 years of purchase displaying AMETEK's experience in choosing viable companies that work well with their business model.
With over 35 acquisitions and $7 billion deployed since 2013, AMETEK has key purchases that have elevated its business model to new heights of efficiency and subsequently profitability. Abaco Systems exemplifies this expansionary strategy as it utilized $1.35 billion to gain access to embedded computing systems that are ruggedized to meet MIL-STD environmental standards for extreme vibration, temperature, and altitude. This acquisition has also added $350 million in revenues to their company and strengthened AMETEK's position in aerospace and defense, as well as specialized industrial applications segments, while also improving their brand reputation as a more high-quality, durable product.
Abaco Systems is just one example of AMETEK's acquisition strategy, which has enabled the company to expand its offerings and reach new markets. In addition to acquiring companies, AMETEK has also invested heavily in research and development to create new products and improve existing ones. This commitment to innovation has resulted in a portfolio of high-quality products that meet the needs of a diverse range of customers across industries.
One of AMETEK's key strengths is its ability to integrate acquired companies quickly and efficiently. By leveraging its existing infrastructure and expertise, AMETEK can identify and implement process improvements that help the acquired companies operate more efficiently and effectively. This integration process is supported by a strong culture of collaboration and knowledge sharing, which helps ensure that best practices are spread throughout the organization.
Analyst consensus rates AMETEK as a "buy". The stock, although overvalued in my view, holds solid return potential and presents an average 10.63% upside potential at $160.79, which helps solidify its long-term value.
Before creating my assumptions and calculating my DCF, I will calculate the Cost of Equity and WACC for AMETEK using the Capital Asset Pricing Model. Factoring in a risk-free rate of 3.47%, I was able to conclude that the Cost of Equity was 8.11% as displayed below.
Assuming this Cost of Equity value, I was able to calculate the WACC to be 7.68% as shown below, which is under the industry average of 13.32%.
Based on my analysis using a Firm Model DCF approach with FCFF and without CapEX, it has been determined that AMETEK is currently overvalued by 31% compared to a fair value estimate of approximately $100.23. This valuation was achieved by applying a discount rate of 7.68% for a 5-year period and factoring in a mid to high single-digit growth rate for revenue beyond 2023.
Furthermore, my analysis takes into account the company's strategy of continuously improving its innovation and acquiring more efficient assets, which is expected to result in a gradual decrease in its operating ratio and an increase in its operating margin over time. This is demonstrated in my DCF model, which illustrates the potential for sustained growth and profitability for AMETEK.
Potential Macroeconomic Headwinds: There is a risk of macroeconomic headwinds for AMETEK, as a potential recession within the next year may lead to a decrease in revenue due to companies' efforts to cut costs. The decrease in revenue may result from high inflation and rising rates, which could weaken buyer power.
Integration Failure: Inability to integrate AMETEK's constant acquisitions can hurt the company's ability to grow as displayed in recent years. Such weakness in a strategy that takes 70% of their FCFs could present an opportunity for new entrants to capitalize and compete with AMETEK while current competitors may continue and also steal customers.
In summary, my recommendation for AMETEK is a hold, given the company's consistent growth through organic and strategic means. Additionally, the stock offers safe but small dividends and buys back shares at high prices, making it a relatively safe investment. However, with an overvaluation of 31%, waiting for a more attractive price point may be prudent until the company's performance catches up with its current stock price.