VioletaStoimenova
In November of last year, I believed that AMETEK, Inc. (NYSE:AME) was putting some money to work again, announcing two bolt-on deals after 2022 has been quite strong so far. Liking the performance of the business and its strategy, I was upbeat on the business but found the valuation a bit too demanding to get involved.
Following impressive deleveraging so far this year and sound operating performance, I become even more upbeat on AMETEK here, certainly after what appears to be a great (and this time larger) deal for Paragon.
A Niche Player
AMETEK produces high-technology products which are designed to solve complex problems which its customer faces. There are more industrial businesses which do the same, but AMETEK has combined this with a decentralized organizational structure, with the combination standing at the basis of its winning strategy.
Pre-pandemic AMETEK was a $5 billion business which was comprised out of a $3 billion Electronic Instruments Group, a very profitable business which posted margins in the twenties, derived from the production and sale of analytical instruments, test materials and mission-critical equipment.
The company furthermore owned a $1.8 billion electromechanical group which posted margins around 20%, derived from products like precision motion control systems and other engineered products.
Pre-pandemic, AMETEK was a $100 stock which posted earnings of around $4 per share, as a 25-times earnings multiple was not cheap, yet this was achieved in a low-interest rate environment, while the track record and positioning of the business was quite good.
Post-pandemic shares rose to a high of $150 at the start of 2022, as they traded at $130 in November 2022, when I last covered the shares. (Bolt-on) dealmaking meant that 2022 revenues were on track to come in around $6 billion as earnings were seen at roughly $5.50 per share, marking real achievements from pre-pandemic levels.
Trading at $130, the company commanded a $30 billion equity valuation with 230 million shares outstanding, while pro forma net debt came in around $2 billion. This valued the business at around 23 times earnings, a demanding multiple in a higher interest rate environment.
That conclusion did not change meaningfully as the business announced a combined $430 million purchase of Navitas and RTDS Technologies, in transactions set to add about $100 million in annual sales.
Stable Performer
Forwarding from November of last year to today, we have seen shares see modest gains from $130 in November last year to $140 at the moment of writing, although truth be told is that shares traded at highs of $165 this summer.
In February of this year, AMETEK posted its 2022 results, a year in which revenues rose by 11% to $6.15 billion. GAAP earnings rose 17% to $1.16 billion as a stable share count made that earnings per share rose by similar percentages to $5.04 per share, with adjusted earnings posted at $5.68 per share. The company guided for modest top line sales growth in 2023 as adjusted earnings were hiked towards the $6 per share mark at the higher end of the range.
After posting solid first quarter results, AMETEK announced the purchase of Bison Gear & Engineering in May. While no purchase price was announced, an $80 million net sales contribution suggests that the deal adds little over a percent to total sales. This prompted AMETEK to increase the guidance again following the release of the second quarter results.
In September, AMETEK announced its next bolt-on move with the acquisition of United Electronic Industries. Again, no purchase price had been announced as the deal is set to add $35 million to annual sales.
On the final day of October, AMETEK posted third quarter results, and while third quarter revenues were up just 5%, the company guided for full year sales to increase by mid-to-high single digit percentages, with adjusted earnings now seen at a midpoint of $6.32 per share, as notably the Electronic Instruments Group has seen continued growth in recent times.
Despite the dealmaking efforts during the year, AMETEK has reduced net debt to just $1.3 billion, all while EBITDA is trending close to $2 billion here, leaving ample financial room for more capital deployment.
More Deals
Alongside the release of the third quarter results, AMETEK actually announced two deals. The first is the purchase of Amplifier Research Corp, a manufacturer of RF and microwave amplifiers equipment, a business set to add another $60 million to total sales (adding bout a percent to pro forma sales).
The bigger deal was a $1.9 billion deal to acquire Paragon Medical, a provider of highly engineered medical components and instruments. The producer of orthopedics, minimally invasive surgery, robotic surgery and drug delivery is set to add $500 million in sales, marking a big deal at just 3.8 times sales. The Q3 conference call revealed that about an 15 times EBITDA has been paid, suggesting about a $125 million EBITDA contribution.
With pro forma net debt seen at $3.2 billion, or a bit more given some recent deals, leverage is no issue at all with EBITDA of the own business trending at $2 billion already.
And Now?
The latest deal likely sets AMETEK, Inc. up for earnings power of $6.50 per share, as the resulting earnings multiple looks reasonable at 21-22 times earnings. This comes as pro forma leverage is still very reasonable, while the company has a great track record, but still trades at a premium versus the market, a very well-deserved premium given its performance.
Quite frankly, I am more impressed by the business track record and M&A performance than I was before. Hence, I remain quite upbeat on AMETEK, but would prefer to be able to buy this value creator at a 20 times multiple. This works down to about a $130 per share entry point, levels which we hopefully might see soon in order to get involved with this excellent long-term value creator.
