Mindful Media
Investment Rundown
AMETEK, Inc. (NYSE:AME) offers their customers industrial technology solutions that help streamline their business and make operations more efficient. They don’t place a focus on one industry, but rather serve many niche markets, as per their own description. The market in the US is large but accounts for 50% of the revenues for AME which further diversifies their revenue streams and has helped them continuously grow their net margins.
The valuation of the company right now might be a little bit higher than the sectors, but sometimes if you want to be invested in a solid business like AME which has phenomenal growth prospects as the industry is experiencing strong demand, then paying a little extra is necessary. AME gets a buy rating.
Company Segments
Within AME there are two main segments, the Electronic Instruments Group (EIG) and the Electromechanical Group (EMG). They have achieved the same operating margins of 26%, but EIG is the main source of sales, as they netted $4.2 billion here in 2022.
Company Segments (Investor Presentation)
The EIG segment focused on the test and measurement side but also works with the design and manufacturing of advanced analytics. The segment is exposed to several megatrends that should help fuel growth. The need to further improve our energy infrastructure is large and EIG will in my opinion grow substantially as a result over the coming years. With several secular growth trends impacting the company, they should remain rather stable in their growth, as some support whilst others decline.
The second segment, the EMG, is focused rather on automation and precision motor controls. This is an exciting part of AME as I think this will be one of the growth drivers for the entire business. The need and demand for industrial automation are certainly strong. Expectations are that the industry will grow by around 8% CAGR until 2030. A focus lies in both of these segments on developing new products. In the last three years, new products have accounted for 27% of the sales in the business, up from 16% back in 2005. This to me shows that the market is both ready to adapt to new technology and that AME is in a position to supply that demand too.
Acquisitions Fueling Growth
One of the most impressive parts of the capital deployment strategy that AME has had over the years is the sheer amount of capital and FCF spent on acquisitions. Since 2014 they have deployed 70% of FCF to those causes, which translates to over $10 billion. The remaining 30% has been used for dividends and share repurchases.
Cash Generation (Q1 Presentation)
Looking ahead AME remains in the same position as to where their capital deployment prioritizes lies, acquisitions above all else. But it shouldn't deter investors seeking a dividend opportunity or a company buying back tremendous amounts of shares. The acquisitions help accumulate more cash flows to AME which in the long run will help fuel dividend increases and new buyback programs.
It was not long ago that AME acquired another company. Bison Gear & Engineering had annual sales of $80 million, which is a nice addition to the EMG segment of AME. Paying a p/s ratio of 1 for Bison would be easy as AME has in the TTM generated nearly $1 billion of levered FCF, which leaves them with a margin of 15%. Leveraging their cash flows has proven successful, as the share price is up around 108% in the last 5 years. AME is essentially a growth company fueling its growth by buying out the competition before they get too large and pose a threat.
Earnings Highlights
Looking at the most recent report from AME they had an impressive margin expansion in the EIG segment driven much by recent acquisitions for the segment but also a solid operational performance which resulted in excellent results.
Looking at the second segment, EMG also experienced a slight margin expansion, but revenues remained rather robust as the addition of Bison Gear & Engineering is helping out with growth. The results of the buyout will be more visible in the coming quarterly report in my opinion.
Income Statement (Q1 Report)
The strong performance by AME in the quarter resulted in solid EPS growth of 12.8% YoY. If AME can continue growing like this as a result of further acquisitions then the current p/e of 25 seems rather fair to pay in all honesty. AME has built up a strong balance sheet with a cash position of around $400 million. As AME buys out these companies, they are also assuming the debts of them but that hasn't meant the AME has overleveraged themselves. The net debt/EBITDA ratio still sits very safely at 1.1 currently. Highlighting the low likelihood of AME needing to dilute raise in the prospects of raising capital for debt.
As for where AME sees itself going, the guidance was updated on a positive note and the EPS is expected to come in somewhere between $5.96 - $6 which would represent a YoY increase of 5% - 7%. The solid operational results from Q1 help support this revised guidance and I find it likely the remaining quarters of 2023 will have equally solid results.
Risks
One of the more concerning risks I see that could affect AME in the future is that they eventually get blocked in acquiring a company. That would slow down growth for AME as they rely on acquisitions to funnel new revenue streams into their segments. If regulators become increasingly harsh or face pressure from other directions then AME will have to operate in a very different market environment, one where they can't always buy out competition before they get too big.
Besides that, the company is buying back shares with some of its cash flows, but they are also consciously doing stock-based compensations. In 2022 that amounted to $47 million. Although not massive, I find it counterproductive for the other shareholders in terms of making their positions appreciate in value.
Final Words
Gaining exposure to the trend of continued automation of our solutions is something most investors should consider. It's a market growing at a strong rate and with AME having the capital to make meaningful and solid acquisitions they are able to capture and outperform the industry.
With a forward p/e of 25, some might think the price doesn't scream a bargain I would have to agree. But I think that given the quality of AME and the history, they have grown their earnings through acquisitions then paying a premium perhaps can't be entirely avoided. I think a pullback is possible given that the share price has run up 44% in the last 12 months. But timing the market is never a good strategy and I think AME stock still deserves a buy rating here.
