AMETEK (Ametek) (AME) has proven to be a great long-term value creator, in part because of a savvy M&A strategy. With the company announcing another bolt-on deal, it is time to update the investment story on the stock, although Ametek, like the rest of the market, has become quite pricey with investors across the world scrambling for yield.
The Company, A Great Set-Up
Ametek is a manufacturer of high-technology products. The company believes in a decentralised organisation structure and focuses on niche market segments. Over time, it has grown to become a $5.0 billion business with roughly half of sales generated overseas. While the company is active in many end markets, the business is more or less split up between two segments on which it reports segment results.
The $3-billion Electronic Instruments Group is the largest and most profitable segment with $3.0 billion in sales and segment margins of 26%. This includes analytical, test, and mission-critical communication products for the process and power & industrial business, among others. This segment is complemented by the Electromechanical Group which generates $1.8 billion in sales and supports somewhat lower margins around 20% of sales. This unit develops precision motion control systems and other engineered solutions for aerospace and automation industries. Note that these numbers have been provided in a recent investor presentation and are still based on 2018 results.
A strong leadership position in relevant niches and focus on industries with secular tailwinds create a nice set-up in terms of the organic growth profile of the business, which in its part is supported by a healthy 5% of sales being allocated to R&D. This has allowed the company to grow sales from $2 billion to $5 billion over the past decade as margin gains and share repurchases have boosted earnings per share even more. Most of the generated capital was deployed on deals, with more than $8 billion being spent on acquisitions in the past 10 years, while much less has been geared towards dividend and share repurchases.
Besides attractive end markets and cultural fit, Ametek is a heavy believer of healthy IRR contributions from deals, as this discipline has served the company and shareholders well.
The Latest Deal
Alongside the release of the 2019 results, Ametek announced the acquisition of IntelliPower, a provider of ruggedized uninterruptible power systems which are used in defense and industrial applications. The high-efficiency, power-switching technology of the company can be remotely monitored and managed, compelling given the conditions in which it has to function.
Ametek will pay $115 million for the California-based company which will add $40 million in annual sales to Ametek, suggesting a near 3 times sales multiple has been paid, as the unit will be placed within the company’s EIG segment. This is truly a bolt-on deal, as it adds about 80 basis points to reported sales growth. While this is a nice addition, it is far from a game-changer, of course.
As said, the latest deal is truly a bolt-on deal which was announced alongside the 2019 results. A net debt load of $2.38 billion by the end of 2019 will jump to $2.50 billion following the latest deal which looks high in relation to the reported sales, yet note that this is a very profitable business.
Based on GAAP accounting, the company reported $1.18 billion in operating earnings. With D&A expenses running at $170 million already in the first nine months of the year (as the 10K was not filed yet), I see EBITDA at more than $1.4 billion, resulting in very manageable leverage ratios comfortably below the 2 times mark.
The company reported a 3% increase in fourth-quarter sales and a 6% increase in full-year sales with revenues coming in at nearly $5.2 billion. Amidst sky-high margins, the company reported a GAAP profit of $861 million which is equivalent to $3.75 per share, while realistic adjusted earnings came in at $4.19 per share. As most of the discrepancy between both earnings metrics originates from amortisation charges, I am happy to use the adjusted earnings numbers. Based on that performance, shares trade at 23 times earnings at $98 per share.
Despite uncertainties in the global economy in this year, management believes that reported sales will increase by low single-digits with organic sales seen roughly flat. Adjusted earnings are seen at $4.24-4.38 per share and included in this outlook is the sale of the Reading Alloys business. This sale had already been announced in January as Ametek will fetch $250 million for this business, but at the same time lose $160 million in sales, in an effort to bolster the positioning of the firm to growth markets.
It should be very clear that Ametek is a great long-term value creator, yet with shares trading at essentially 23 times forward earnings while leverage is reasonable, the valuation is at least very full, although the earnings yield at this level still looks compelling in relation to interest rates, most certainly given the growth positioning of the company.
Nonetheless, I like a bigger margin of safety given the low interest rates, further keeping in mind that shares have doubled over the past three years already, pushing up valuation multiples at the same time as well.
Given this set-up, I like the business as a true long-term multi-decade investment, yet not as a short or medium play as multiple contraction could easily wipe out continued operational advancements. Hence I am sticking with a market multiple or perhaps a small premium as a fair entry point, more or less translating into a targeted entry in the low-$80s based on current performance.
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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.