Mettler-Toledo: Overvalued Business With Balance Sheet Concerns (NYSE:MTD)

Overview

Mettler-Toledo (NYSE:MTD) is a leading provider of precision instruments and services. The company operates in the laboratory, industrial and food retail markets worldwide. Its products include weighing instruments, analytical instruments and various other types of process analytics equipment, as well as software and services related to these products.

The company sells its products through a combination of direct and indirect sales channels, including a global network of subsidiaries and distributors. They also provide related services such as calibration, maintenance and repair. The company’s business strategy is focused on maintaining its position as a market leader in precision instruments, as well as expanding its customer base and product offerings through new product development and strategic acquisitions.

MTD has five reportable business segments which include US Operations, Swiss Operations, Western European Operations, and Other. The US Operations make up about 21% of total revenue, Swiss Operations make up another 21%, Western European Operations make up 17%, Chinese Operations are the largest business segment by revenue with 34%, and the Other segment which includes Southeast Asia, Latin America, Eastern Europe, and other countries made up 14% of revenues.

Although parts of the company, including its Toledo line, established in 1901 as the Toledo Scale Company in the United States, predate the company, Mettler traces its official origins to 1945 and the invention of the single-pan analytical balance by company founder Erhard Mettler.

MTD was officially founded by Erhard Mettler in Switzerland in 1945 with Mettler’s invention of the single-pan analytical balance, which was a revolutionary technology at the time. However, some parts of the business, including the Toledo line, were established by the Toledo Scale Company in the US as early as 1901. The business has since grown organically and through acquisitions. Today, MTD is a leading global supplier of precision instruments and services, and its products are sold in more than 140 countries.

Performance

MTD has been consistently reporting positive financial results and though it’s not an extremely fast grower, the company has been growing its revenue and profits modestly over the years. In terms of revenue, Mettler-Toledo reported revenue of $3.89 billion over the past 12 months. This represents an increase of 67.32% over the previous decade. The company has only reported one year of revenue decline in the past ten years.

In terms of free cash flows, MTD has reported consistent growth over the years. The company reported free cash flow of $670 million over the past twelve months, representing an increase of over 150% compared to its free cash flows a decade ago. The company’s free cash flow margin has been consistently in the double digits over the last five years.

Additionally, MTD has produced strong returns on invested capital. The company has a current ROIC of 36% which is slightly above its ten-year average of 34%. The company hasn’t had a year below 31% over this time period.

MTD has produced consistent growth and high returns on invested capital, but the company’s balance sheet reveals a significant decline in the company’s financial health. As of the end of the quarter, MTD’s liabilities exceeded its assets by $82 million, indicating that the company’s debts are higher than the value of its assets. In addition, the company’s total debt has risen 378% over the past decade. This is a concerning sign for investors and analysts, as it suggests that the company may not be able to pay its debts if they were due today.

Strategy

MTD has several strengths that it can leverage to gain market share such as its dominance in various markets worldwide, a broad range of customers, cutting-edge products, investments in new markets, a large customer base, and the effectiveness of its worldwide sales and marketing efforts.

The company is focused on gaining market share through innovating every aspect of the business including sales, marketing, and technology. These efforts include investing in growth opportunities, adjusting pricing strategies, enhancing the efficiency of its sales team, redirecting resources towards high-growth areas, implementing digitalization tools and refining its methods for generating and nurturing leads which have all attributed to the company’s 26% growth in sales over the past two years.

Additionally, MTD will also look to expand in emerging markets such as Asia, Eastern Europe, Latin America, the Middle East, and Africa which currently account for 36% of its revenue. These markets are long-term growth opportunities for MTD, and the company can leverage its low-cost manufacturing operations in China to broaden its product offerings in these key growth markets. MTD has an impressive track record in these regions, they’ve reported sales growth of 13% compounded annually in these markets since 1999.

Valuation

To estimate MTD’s intrinsic value, a comparative and discounted cash flow (“DCF”) analyses will be used. The comparative analysis will consist of taking the highest, lowest, and average price-to-earnings ratios the market has paid for MTD over the past five years and multiplying them by MTD’s consensus 2023 EPS estimate of $42.60 per share. As a bonus, the current sector median valuation of 25.35 will also be applied to MTD’s consensus 2023 EPS estimate to estimate an additional scenario.

Scenario	P/E	trailing 12-month EPS	Intrinsic Value Estimate	% Change from Current price
Bear Case	25.77 Minimum JAN 03 2019	$42.60	$1097.80	-28.51%
Base Case	39.68 5-Year Average	$42.60	$1690.37	10.07%
Bull Case	53.68 Maximum SEP 08 2021	$42.60	$2286.76	48.91%
Sector Median Valuation	25.35	$42.60	$1079.91	-29.67%

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On a comparative analysis, MTD has a wide range of scenarios that can play out. Investors could realize an excellent 48.91% return if the market were bullish and applied the 53.68 multiple, seen in 2021, to next year’s average analyst earnings estimate, should those estimates materialize. On the downside, investors could realize a 29.67% loss if the market were to value MTD at sector median valuation.

Turning to the discounted cash flow analysis, the starting point will be the average of the last five years of free cash flows, which is $468 million. Then a 7% growth rate will be applied to the free cash flows for the next ten years based on rule 72, which states a 7% growth rate will double the original value in 10 years. Rule 72 will be followed for this DCF because it’s challenging to accurately forecast free cash flow growth rates multiple years into the future. However, based on the MTD’s past performance and strong growth opportunities in the future, a 7% growth rate of free cash flows is achievable over the next decade.

Following the 10th year, a 2.5% growth rate will be used into perpetuity to determine the terminal value. A discount rate of 10% will be used, representing my personal required rate of return. With these inputs, the DCF analysis estimates MTD’s intrinsic value is $503.13, representing a downside of more than 67% from the company’s current share price.

If you believe a 7% growth rate over the next ten years is too conservative, consider that MTD could grow by 20% over the next decade, and still be overvalued at its current share price.

Takeaway

MTD has established itself as a leading provider of precision instruments and services thanks to its broad range of customers, cutting-edge products, and its world class sales and marketing efforts. It continues to execute on its growth strategies as it consistently reports revenue and free cash flow gains year after year. As the company continues to invest in new technologies and emerging markets, these positive growth and profitability trends should continue. However, the company’s balance sheet is a cause for concern as its liabilities exceed its assets. In addition, MTD’s sky high valuation forces me to rate this business as a sell. If you disagree, please let me know in the comments section.

Thank you for reading!