Maksim Labkouski
In the summer of last year, I was looking for an entry point in the long-term steady value creator Ametek (NYSE:AME). The combination of a sound bolt-on dealmaking track record, solid capital allocation and positioning into resilient markets creates a compelling long-term investment case.
Some Perspective
Ametek produces high-technology products which solve complex problems for customers. This in itself is not uncommon, yet the combination of a very decentralized organizational structure and focus on niches stand at the basis of a winning strategy.
Ahead of the pandemic, the company posted $5 billion in sales, generated by a $3 billion Electronic Instrument Group, a very profitable segment with operating margins posted in the mid-twenties. Products to think of include analytical instruments, test materials, mission-critical equipment, etc. The electromechanical group is a bit smaller with $1.8 billion in sales as its margins trail at still a respectable 20%. Products made here include precision motion control systems and other engineered products.
Ahead of the pandemic, shares of the company traded around the $100 mark as earnings came in at just above $4 per share, resulting in a high multiple given a mere 4.5% earnings yield. That was however in a low interest rate environment as the long-term growth track record and potential was quite strong.
In the pandemic year, 2020 sales fell in high single digits as earnings fell a few pennies short of the $4 per share mark. Fortunately, the company guided for solid growth in 2021 and deleveraged a lot, as the company announced a $1.35 billion deal for Abaco System in the spring of 2021.
Enthusiasm made that shares rose to the $130 mark in June of last year, as the company announced a few more bolt-on deals (a total of five deals in just a few months) which were set to increase net debt to the $3.0 billion mark.
Dealmaking would increase sales by more than half a billion as net earnings accretion (post-financing costs) would likely be limited. With a real roadmap for earnings around $5 per share in the works, a $130 valuation was not too compelling as levels at the $100 marks started to look interesting to me.
Stagnating
After hitting a high around the $150 mark at the turn of the year, shares nearly fell to the $100 mark in June, but a strong rally in recent weeks made that shares rally to $130 again.
This stagnation came despite spectacular results in 2021 with sales up more than a billion to $5.5 billion, as sales ran at a $6 billion run rate based on the fourth quarter results. Adjusted earnings rose to $4.85 per share, as the $5 per share mark came in sight might sooner than I anticipated. Net debt came in at just $2.2 billion following solid cash flow generation as operating earnings came in at $1.3 billion already, resulting in very modest leverage ratios.
With 2022 revenues set to rise 10%, earnings were seen up to $5.30-$5.42 per share, a comfortable guidance by all means. Following a solid first quarter, the company hiked the midpoint of the full year earnings guidance by three cents to $5.39 per share. While the company cut the full year single guidance from roughly 10% to the high single digits, the company hiked the midpoint of the full year earnings guidance to $5.50 per share.
Despite intensifying economic headwinds and the impact of a stronger dollar, the company hiked the earnings guidance again alongside the release of the third quarter results, with the midpoint of earnings now seen as high as $5.62 per share. In the meantime, net debt is down to just over $2.0 billion, a very modest amount given that operating earnings trend around $1.5 billion here.
With 230 million shares now trading at $130, Ametek now commands a $30 billion equity valuation, as the $32 billion enterprise valuation comes in at just over 5 times sales of around $6 billion and around 23 times earnings here.
More Bolt-On Dealmaking
On the first day of November, Ametek has announced two more bolt-on deals. The company has agreed to pay $430 million to acquire Navitas and RTDS Technologies, as these deals add some $100 million at a 4.3 times sales multiple. This suggests that the sales multiple comes in a turn lower than Ametek’s own valuation at just over 5 times sales.
These deals will add nearly 2% to pro forma sales as net debt will remain very modest, leaving ample of room to pursue more deals in the periods to come. Given the performance so far this year, the current valuation looks a lot more interesting compared to June of last year, nearly one and a half years ago.
While appeal has certainly increased, and the performance so far this year is to be applauded, I am cautious here as valuation multiples have contracted a bit, yet the reduced valuation multiple is largely in line with the market.
My conclusion remains the same, if shares fell to the low $100 mark, I am happy to get involved again, as the performance remains quite solid by all means.
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