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Morningstar | Ametek Off to Strong Start in 2019; We Raise Our FVE to $74

Narrow-moat-rated Ametek had a solid 2019 first quarter. While the stock traded down about 1% after the earnings announcement, we think recent acquisition growth in the electronic instruments group and the strong start to the year justified management’s guidance upgrade, and as result we lift our fair value estimate to $74 per share from $72. Our fair value estimate implies over an 18 times multiple to our 2019 adjusted earnings per share estimate, which currently sits at $4.07 (versus $4.08 at the top end of management’s guidance). We retain our narrow moat, stable trend, medium uncertainty, and Standard stewardship ratings.

The firm delivered solid organic overall sales growth coupled with an appreciable contribution from six acquisitions that Ametek completed in 2018. Total sales in the first quarter rose to $1.29 billion, up 10% compared with the first quarter of 2018. Organic growth rose 5% year on year, with acquisitions adding another 7%. Orders remain strong and book/bill was positive, indicating continuing strong demand. One thing we’re encouraged by is Ametek’s backlog of $1.7 billion, which we think provides visibility for top-line organic growth in the remaining portions of the year. After netting out the impact of acquisitions, operating margins expanded 70 basis points over the prior year.

For Ametek’s two segments, management called out materials analysis as a positive growth driver, particularly due to its high-end instrumentation solutions. That segment’s operating income grew to $203.1 million, up a resounding 11% over 2018’s first quarter. Margins for the electronic instruments groups, net of acquisitions, grew 110 basis points, which contributed to this outperformance. The firm’s electromechanical group saw operating income increase 9% year on year.

New developments in the quarter included a collaborative research and development effort between two of Ametek’s businesses (EDAX and Vision Research), demonstrating that Ametek leverages its intangible assets across the entire organization. The firm invests 5% of sales in R&D and employs 1,900 engineers globally. EDAX, which makes material characterization systems (how a material’s structure and properties are probed and measured), has launched its velocity plus and velocity supermodel. At 4,500 frames per second, its supermodel is the fastest electron batch diffraction camera system in the world, a superior solution to what is currently offered in the market. We think this confirms our thesis that Ametek will continue leveraging its switching cost moat source by solving specific customer pain points in niche markets.