Ametek: Well-Placed To Leverage A Broad Multi-Market Recovery

 

With most of its end-markets in recovery, Ametek (NYSE:AME) is enjoying a strong rebound, and the company’s focus on innovation within growing niche markets appears to be supporting healthy pricing in a time where many companies are having challenges from price/cost mix. At the same time, management has been getting back to business on M&A, spending around $1.8B so far this year with another $2B potentially to spend.

I like Ametek’s leverage to automation, process monitoring, and aerospace, as I believe these are markets that are likely to generate above-average growth over the next five and 10 years. I also like the asset-light model and the continuous reinvestment in R&D, not to mention the well above-average margins. The hitch is that valuation is not so straightforward, particularly given the significant role of M&A, and while the forward multiple seems a little low relative to what the Street is paying for other companies with less appealing combinations of growth and margins, the entire sector does still look expensive to me.

 

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Ametek: Well-Placed To Leverage A Broad Multi-Market Recovery

Ametek Looking To Get Back To Meaningful M&A As Pandemic Challenges Ease

If you want to find things to complain about with Ametek (NYSE:AME), be ready to put in a little extra work. It's possible to fault the relatively low returns of capital to shareholders and the generally high multiples the shares trade at, but neither are particularly damning in my book.

Ametek has shown over and over again that it can identify value-adding M&A targets and then build upon those deals with strong margin improvement (a la Danaher (DHR) and Fortive (FTV)), while reinvesting in the businesses to maintain their competitiveness and pricing power. That, in turn, has driven strong revenue (6% annualized growth for over a decade), good margins, strong (and improving) FCF margins, and above-average returns to shareholders.

Ametek presents two challenges for more fundamentally-inclined GARP-style investors. First, M&A is core to the business plan, but challenging to model on a year-to-year basis. Second, the company is a cash-generating machine and rarely trades at what look like conventionally cheap valuations.

I am concerned about the potential future impact on the share price from today's low rates and somewhat stretched industrial valuations, but I believe Ametek is in that upper echelon of high-quality industrials, and I believe the prospective returns today (mid-to-high single-digits) are in line to slightly better than the peer group average, and Ametek still offers some relative value.

 

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Ametek Looking To Get Back To Meaningful M&A As Pandemic Challenges Ease

Seeking Alpha: Ametek Deserves Its Premium

Ametek (AME) is an odd, not-so-little industrial company. Although it produces over $3 billion a year in revenue, it's not widely followed by large investment banks (though it does have plenty of institutional ownership). It's also an unusual company in that management is content to focus on product innovation in niche businesses and stay concentrated on a component-oriented business model. While the shares are not especially cheap today, this looks like a classic example of a stock to put on a watch list in hopes of taking advantage of a future pullback.

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Ametek Deserves Its Premium